Exploring nEw lEasing ModEls in an OMNI-CHANNEL WORLD › competition › antitrust › e... · an Omni-Channel World 34 6.4.1 Click and Collect 35 6.4.2 Returns 36 6.4.3 Online Transactions

Exploring nEw lEasing ModEls in an

OMNI-CHANNEL WORLD

2

Foreword 3

Executive summary 4

1.0 introduction 7

2.0 The Evolution of omni-Channel retail 9

3.0 retailers’ Evolving Business Models 15

3.1 FromMulti-ChanneltoOmni-ChannelOperations 15

3.2 StorePortfolioOptimisation 17

3.3 PurposeAndValueofTheStore 19

4.0 shopping Centre owners’ Evolving Business Models 20

4.1 PortfolioSpecialisation 20

4.2 ShiftFromSpace-MakingtoPlace-MakingStrategies 21

4.3 DigitisingtheBusinessModel 23

4.3.1 CustomerExperience 23

4.3.2 EnhanceSales 24

4.3.3 CustomerInsight 24

4.3.4 RetailerRelationshipsandRevenues 25

5.0 Changing lease strategies 26

5.1 TenantMix 26

5.2 LeaseLength,SecurityofIncomeandSecurityofTenure 28

5.2.1 U.S.LeaseStructure 28

5.2.2 EuropeanLeaseStructure 29

5.3 NewServicesandRevenueStreams 30

6.0 rental Capture 31

6.1 NegotiatingProcess 31

6.2 CurrentRentModels 31

6.3 Omni-ChannelChallengesforRentModels 32

6.4 CapturingStoreValueinanOmni-ChannelWorld 34

6.4.1 ClickandCollect 35

6.4.2 Returns 36

6.4.3 OnlineTransactionsIn-Store36

6.4.4 The‘Halo’Effect 36

7.0 The Toolbox 38

7.1 FixedRentModels 38

7.2 TurnoverorPercentageRentModels 39

7.2.1 ConventionalTurnoverRentModels 40

7.2.2 EuropeanFactoryOutletStyleLeasingModels 41

7.2.3 Geo-FenceTurnoverModels 42

7.3 UseofAlternativePerformanceMetricswithLeaseModels 43

7.3.1 NetShoppingHours 44

7.3.2 VolumeofCustomers 44

7.3.3 ConversionRatesandBasketSize 44

8.0 outlook 46

list of Contributors 47

notes 48

TAbLE Of CONTENTs

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ACkNOWLEDGEMENTsThis report was prepared and written by Brenna o’roarty (rHl strategic solutions) and alan Billingsley (Billingsley investments), in close collaboration during all stages of the project with ICsC Research. special thanks to the European research group and north american research Task Force (two of iCsC’s global research advisory groups) for their support and advice.

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fOREWORD

It isalreadyclearthatallaspectsoftheshoppingcentre industryarebeingtransformedbytoday’srapidlyevolvingdigitalera.Thisstudyexaminesindetailhowoneespeciallyfundamentalcorefunctionisbeingaffected:leasing.

Shoppingcentrelandlordsandtenantsareadaptingtoa‘newconsumer’usinghomecomputers,tablets,smartphonesandin-storekiosksorsalesassociatestoresearch,experienceanddecideonaproduct.Thatmorecomplexconsumerjourneyispresentinganadditionalchallengetotheowner-tenantrelationship,forcingtherealisationthatthelongstandingleasingmodel,basedonmetricsinvolvingin-storesales,needstobereexamined.

Thegoalofthisreport is tostartaconversationonthissubjectandraiseawarenessoftheemergingoptions.Atthesametime,itaffirmsnotonlythatthestoreremainsthecornerstoneofsalesandmarketingstrategyintheomni-channelenvironment,butalsothatthevalueofalocationnowencompassesmorethansimplythesalesgeneratedbythatphysicaloutlet.

Despitethepowerfulforcesofglobalisation,local,regionalandnationalmarketsretaintheirindividuality, so a ‘one-size-fits-all’ approach would be inadequate in addressing this multi-facetedsituation.Forthatreason,thisstudyanalysedtheresultsofextensiveinterviewsinboththeUnitedStatesandEurope,findingmultiplevariationsinhowrespondentsareanticipatingthenewstateofaffairs—andofferingsignpostsforthosetravelingdownthisevolvingpath.

The multiple headwinds affecting the retail real estate industry worldwide in recent yearshaveonlyreinforcedtheneedforfarsightedleadershipthatcontinuestoadvancecompaniesthroughunfamiliarwaters.Partofthatleadershiprequiresembracingtechnologythatpromisestoalterevenfurtherrelationshipsbetweenconsumersandbusinessesandbetweenownersandretailers.Thisreporthasbeenwritten—andisnowbeingoffered—inthatsameconfidentspirit.

StephenD.LebovitzICSCChairmanPresidentandChiefExecutiveOfficer,CBL&AssociatesProperties,Inc.

4

ExECuTIvE suMMARy

Thisresearchreviewstherevolutionofomni-channelretailandexamineshowownerandretailerbusinessmodels are adapting to the digital era. A revolution in omni-channel retail is altering or will soon altertraditional retail rent/leasingmodels. In this report,weanalyse the impactof thismassive transitiononoptimalretailrent leasingmodelsandexaminehowbothtenantsand landlordsareadjustingtochange.Theanalysis isbasedonprimaryandsecondaryresearch, includingthefindingsfromapproximately90interviewswithrepresentativesofretailers,shoppingcentreownersandotherindustryexperts,andfrompresentationstospecial interestgroupswithin the ICSC, involvingover200membersacross theUnitedStates and Europe. Consequently, the project has sought to give a voice to the industry on the futuredirectionofretailleasingandrentalmetrics.Ratherthanattemptingtoprescribeonespecificleasingmodelformorsetofforms,thisreportprovidesatoolboxthatincludesawidespectrumofpossiblealternativestoaidtheindustryasitconsidersanddevelopsfutureleasingmodels.

The key findings of the research are:

• new technology, in tandem with wider structural economic and societal macro trends, has facilitated and accelerated changes to consumer buying behaviour. Theconsumerdecision-making journey ismore complex, involving cross-channel shopping activity—often in real time— pre-, during and post-purchase. The permutations of shopping patterns are manifold, varying not only across consumers,butalsowiththemodeandmoodofanyoneindividual.Mostretailersandownersareimplementingomni-channelbusinessmodelstoharnesssuchchangeandbettermeettheexpectationsofthenewconsumer.

• The scale and rapid pace of change requires a major restructuring of retailer business models across multiple dimensions including inventory management, distribution, customer insight, merchandising, marketing and accounting.Eventhemostadvancedretailershaveyettofullyimplementtheiromni-channelstrategies.

• Far from diminishing the role of the physical store, digital retail has expanded it. Mostomni-channelstrategiesareanchoredonstoreportfolios,withtheirvalueextendedfrombeingapointofsale(POS)tothebackboneofomni-channelsalesandmarketingstrategies.Consumersareengagingwithmultiplein-storeandonlinetouchpointsbeforetransacting.Assuch,itisthecontributionofastoretoasalethatmatters,notthePOS.

• Equally, many owners have been quick to respond to this digital transformation, restructuringbusinessandshoppingcentrestrategiestobetteranticipateandrespondtoconsumerchange.Realisingthatitisno longer sufficient toofferaccessible,well-designedcentresandgood-quality space to retailers,theyarefocusingonplace-makingstrategiesthatdrawconsumersintoacentralmarketplace,therebyhelping retailers access customers. This represents a fundamental shift in responsibilities betweenownersandretailers,aswellasarecognitionthat,toengageandattractconsumers,thecentremustdelivermorethanastrong,coherenttenantmix.

• new technologies are being explored by retailers and owners. as well as engaging with customers and providing them with superior experience and service, this digital infrastructure enables a much deeper understanding of consumer behaviour within the centre and across channels. These newtechnologiesarestilldevelopingandnostandardhasbeenestablished,butmostfocusontrackinganddeliveringcustomerinsights.Theyareincreasinglybeingusedasabasisforconsumerresearchandnewperformancemeasuresandofferthepotentialforownerstodevelopnewrevenuestreams.

• amid all this digital innovation and change, retail leasing and rental models remain largely unaltered.Dependinguponthecurrentrentalframeworkusedbycontributors,aswellasthefunctionandscaleof shopping centres managed, many retailers and owners considered current leasing models to be

5

‘working,butcreaking.’Asaresult,manyretailrealestateprofessionalsarebeginningtoreevaluateexistingleasingmodelsandrentmetricsintheUnitedStatesandEuropetoassesswhethertraditionalapproachesremainfitforpurpose.

• appropriate solutions will vary between different types of centres in terms of scale and function, and between different types of retailers, in terms of sector and brand power. looking forward, the basis of lease contracts is expected to be derived from one or more of the following three broad frameworks:

1. fixed Rent Models.Theseinvolvea100%baserentwithnoadditionalperformancemetric,usuallysubjecttoeithersteppedincreasesoverthedurationofthelease,ortoperiodicreview,ascommonlyseenintheU.K.Someretailersandownersfamiliarwiththisapproachhavearguedthatcompetitivebidding for a space intrinsically determines the value a store contributes to total sales, includingassociatedonlinesales.Ashortcomingof thisrelativelysimplemodel is thatretailersarenotyetabletoquantifythevalueofastoretototalsales.Althoughtherentagreedatthestartofaleasemight represent a useful proxy, difficulties arise over its applicability over the course of a lease.Givensecurityoftenure,thisiscomplicatedforleaserenewalinEuropeandforperiodicrentreviewsintheU.K.Afurtherdrawbackoftheapproachistheweakalignmentof interestbetweenownersandretailersduetotheabsenceofaperformanceincentive,exacerbatedbythegreaterdegreeofcollaborationbetweenthesestakeholdersthattheshifttowardsomni-channelstrategiesimplies.

2. Turnover or Percentage Rent Models.Thesetypesinclude:

a. Conventional turnover rent models,whichincludeabase,ratherlikeafixedrent,accountingfrom92%to100%oftheestimatedrentalvalue.Baserentsareaccompaniedbyaperformancerent,whicharepayableasapercentageofstoreturnoveronceagreedsaleshurdlesareachieved.Thedifficultywithconventionalturnover/percentageratemodelsisthattheperformancemetricisbaseduponthePOS,notthecontributionofthestoretoasale.Asaresult,intheU.S.,baserentshavebeendriftingupwards,withthepercentagerentlikelytokickinatahigherleveloftargetsales.Otheralternativeadjustmentsofferedaretoincreasethepercentagerateappliedtosales,butthisisonlyaveryapproximatemeasureofthestore’scontributiontototalsales.Someownersareattemptingtoincludeclickandcollectandin-storeonlinesalesinthetotalsalesvolume,butperhapsatareducedpercentage rate. However, strong omni-channel retailers argue that they are driving footfall andincrementalspendingtothecentreandthatattributingthesaletothestoreignorestheircostsofoperatingtheonlinesalesanddistributionplatformthatgeneratedthesale.

b. European factory outlet-style leasing models. Some retailers and owners of more challengedneighbourhood and mid-sized centres suggested, similar to leases implemented in Europeanfactoryoutletcentres,ashifttoalowerbaserent,lowersaleshurdleandhigherpercentageratetoprovide forgreaterrisksharing,giventhegreateruncertaintyofsalesperformance insuchschemes.Animportantelementofsuchagreementswouldbetheabsenceofsecurityoftenureforretailers,withatwo-wayoptiontobreakaleaseifpre-agreedsalestargetswerenotmet.Again,thecontributionofthestoretonon-storesalesisimplicitinthebaserent.

c. geo-fence turnover models.Modelsthatincludeallsaleswithinanagreedgeo-codedcatchmentarea have been proposed by a number of owners. Depending on the transaction, a differentpercentageratewouldbeappliedacrossdifferentcategoriesofsale,including‘clickandcollect,’‘kiosk,’and‘halo’inanefforttoextrinsicallymeasurethevariationinthecontributionofthestoreto different types of sales. However, retailers are generally reluctant to provide turnover dataonnon-storesales.Moreover,whilemanyretailersareplanningtoshifttowardsmergingonlineandstoreprofitcentresbasedupongeo-fencingmodelsanchoredonstoreportfolios,fewhaveimplementedthisstrategy.

6

3. Models using Alternative Performance Metrics. A number of owners of both destination andneighbourhoodcentresintheU.S.andEuropesuggestedthatperformancemetricsshouldbelinkedtotheiroperationalmanagementexpertise,ratherthantosales.Manyretailersindicatedthatwhereownersinvest in innovativeassetstrategiesthatgenerateresults,theywouldbewillingtoacceptnewperformancemetricsthattakethevolumeandvalueoftheconsumeropportunityintoaccount.Anumberofretailersexplainedthatfindingappropriatemetricstorewardownersandmanagersfordeliveringastrongercustomeropportunitymirroredthedifficultyinrewardingsalesstaff.Themorepermutationsinvolvedincompletingapurchase,theharderitistomeasurehowmuchgoodin-storecustomerserviceorsalestechniquecontributestototalturnover.

Astheydetermineappropriateandworkablerentalmetrics,retailersandownerswillengageinconsiderableexploration.Manyoftheseexperimentsrelatetoexistingkeyindicatorsalreadyusedtodevelopstrategicinitiativesandongoingperformancemanagementofthecentreandindividualoccupiers,aswellasnewmetricstoincentiviseretailstaffmoreeffectivelyinanomni-channelera.Amongthenewperformancemetricstoemergefromthediscussionswere:netshoppinghours;volumeofagreed-targetcustomers(notsimplyfootfall);andconversionratesandbasketsize.Ownersadvancedindigitalstrategiesstressedthevalueofthenewinsightstheyareabletoderive,butacknowledgedthatasnewtechnologiesarestillembryonicitistooearlytoembedthemintolonger-termleaseagreements.However,thisareaismaturingrapidlyandwilllikelybeasourceofkeyperformancemeasureswithinfuturerentalagreements.

The digital era is creating an unprecedented pace of change as economies and societies embraceinnovation.Theretailindustryisrunningfasttokeepupwithrapidlyevolvingconsumerdemandsand,indoingso,tocontinuetotransformitselftobetterrespondtoandanticipatechange.Intheomni-channelera, leasingmodelsandrentmetricsthatarebaseduponPOSare losingrelevanceasaproxyforthecontributionofastoretototalsales,andnewapproacheswillberequired.Thisresearchprovidesausefulframeworkastheindustryconsidersthewayforward.Giventhatomni-channelretailinvolvestheblurringoftwoofthemostdynamicandinnovativeindustries—retailandtechnology—itiscertainthatsolutionswillemerge.

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1.0 INTRODuCTION

Newtechnology,intandemwithwiderstructuraleconomicandsocietalmacrotrends,hasfacilitatedandacceleratedchangestoconsumerbuyingbehaviour.Retailersarerespondingwithashifttowardomni-channelbusinessmodels.Equally,manyownershavebeenquicktorespondtothisdigitaltransformation,restructuringbusinessandshoppingcentrestrategiestobetteranticipateconsumerchange.Asaresult,shoppingcentreprofessionalsarereevaluatingexistingleasingmodelsandrentmetricsintheUnitedStatesandEuropetoassesswhethertraditionalapproachesremainfitforpurpose.Ratherthanattemptingtoprescribeonespecificleasingmodel,thisreportsetsoutthefullspectrumofpossibilitiescreatedbythesechangingconditions,withtheaimofprovidingausefulframeworkfortheindustrytoconsider.

Farfromdiminishingtheroleofthephysicalstore,digitalretailhasonlyexpandedit,fromapointofsale(POS)tothebackboneofomni-channelsalesandmarketingstrategies.

Approximately10%oftotalretailsalesoccuronlineineventhemostadvanceddigitalretailmarkets.Itisgenerallybelievedthatthispercentagewillincrease,asonlineretailsalesgainscontinuetooutpacethoseofin-storesales.However,focusingonsalesallocationismisleading.ViewingPOSasameasureofthevalueofastoremasksthecomplexityofthecustomer’sdecision-makingjourneyandthesymbioticrelationshipacrossthephysicalandonlinesalesplatforms.Althoughstoreturnoverasaproxyforstoreperformancehasservedtheindustrywellinthepast,itisbecominglessappropriateasameasureofastore’svalueandcontributiontototalretailsales.

EXPLORINGNEWLEASINGMODELSINANOMNI-CHANNEL WORLD

far from diminishing

the role of the

physical store,

digital retail has only

expanded it, from

a point of sale (POs)

to the backbone

of omni-channel

sales and marketing

strategies.

8

Thetwomajorparticipantsintheleasingprocesshavemovedinparallelstepstodealwiththedigitalage:

Retailers’businessmodelshaveevolvedfrommulti-channeloperationsthatmanagedonlineand store operations in parallel, into one integrated platform. Most have developed omni-channelstrategieswiththeaimofbetterrespondingtotheircustomers’needsandpreferences.Thoughfewhaveestablishedseamlessoperations,1the physical store remains the cornerstone of retailers’ omni-channel strategies,withavalueconsiderablygreaterthanasamerePOS.

Ownershaveadaptedtheirownbusinessmodels.Recognisingthattheyarenolongerjustofferingwell-located,good-qualityspacetoretailers,theyarefocusingondeliveringandenhancingasenseofplacethatdrivesconsumerstoacentralmarketplace,therebyhelpingretailersaccesscustomers. Moreover, in a fundamental shift in the relationship between shopping centreownersandretailers,somelandlordsarealsousingnewtechnologiestofacilitatetheinterfacebetweenthecustomerandthestore.Atthesametime,theretailerisrelyingmoreheavilyontheshoppingcentretoattractandengagetoday’sdemandingconsumer.

Amid all this digital innovation and change, retail leasing and rental models remain largelyunaltered,withthemetricsunderlyingmostrentalagreementsunchanged.

The aim of this research is to establish how retailers and owners are changing their business models in response to the evolution of omni-channel retail, what their current and anticipated challenges will be, and how these changes are shaping asset strategies, leasing models and in particular, rental metrics.

Thefindingsarebasedonbothprimaryandsecondaryresearch.Approximately90interviewswereundertakeninEuropeandtheU.S.withrepresentativesofretailersandshoppingcentreowners,aswellasotherindustryexperts.2Thecontributorsarerepresentativeofthegeographicreachofthestudy.Aseriesofworkshopswereundertakentobuilduponthepreliminaryoutput.AdditionalinputwasreceivedduringsixpresentationsofpreliminaryfindingstomemberspecialinterestgroupswithintheICSC,capturingfurtherfeedbackfromapproximately200members.Assuch,theprojecthassoughttogiveavoicetotheindustryonthefuturedirectionofretailleasingandrentalmetrics.

INTRODUCTION1

9

BillGateshassuggestedthat‘wealwaysoverestimatethechangethatwilloccurinthenexttwoyearsandunderestimatethechangethatwilloccur in thenext ten’.3By2000, itwasalreadybecomingclear thattheconsumerbrowsedonlineandshoppedin-storeandvice-versa.Thebiggest impactoftheInternet intheseearlyyearswastheaccelerationofcompetitivepricing,particularlyforcommoditygoodsincludingelectronics,books,andmusic.4

Although the digitisation of products themselves was not foreseen as occurred, for example, withinpublishing,musicandgaming,otherretailersheededGates’warninganddevelopedonlinechannelstohelpprotectandgrowmarketshare.5Beyondcommodity-shapedgoods,existingnationalandinternationalretailers,especiallythosewithanestablishedcataloguechannel,hadacompetitiveadvantagegiventheirexisting brand value strength, customer base, scale and logistics networks. In most markets, the firstdecadeofthe21stCenturywitnessedarapidshiftfromabinarymarketofpure-playe-tailervsphysicalretailertoonedominatedbymulti-channelretailersandonlinebehemoths.Web-onlyretailerscompriseapproximately30%oftotalonlinesalesintheU.S.,mostofwhichisfromoneretailer,Amazon.Onlysomepure-playe-tailersareprofitable.Astheyfocusongrowthinmarketshare,manyoftheseareestablishingsomeformofphysicalretailpresence.

Theemergenceandrapidgrowthofsmartphones,tabletsandtheseeminglyexponentialriseoftheInternetofThings(IoT)since2010havefurtherencouragedconsumerautonomy.Consumerbehaviourisnolongerbinary; consumers can—and are—shopping simultaneously online and in-store, seeking opinions frompersonalnetworks,readingpeerreviews,inventorycheckingandundertakingpricecomparisoninrealtime.Moreimportantly,consumershaveseamlesslyintegratedtechnologyintotheirbuyingbehaviour(Figure1).Suchshoppingjourneysarecomplexandvarybetweenconsumersandacrossdifferentmodesandmoodsofshopping.Consumersbrowseinventory,compareandresearchproductsonlineand/orin-storeinadvanceofapurchase.Forexample,aconsumermightresearchaproductonline,experiencetheproductin-store,and,afterreflection,purchaseitonlineforanin-storepick-up.

POSisoneofmanystepsalongthisjourneyanditsplaceisrelativelyunimportanttotheretailer’sprofitability.Fulfilmentoftheproductisalsovariableandmaybereceivedimmediatelyin-store,collectedfromstoreordeliveredtohomeoranalternativeaddressorcollectionpoint.Thecustomerjourneyalsoextendsbeyondthe purchase decision with the post-purchase experience, which includes reviews and returns, but alsopresentstheopportunityforretailerstomakefurtherrecommendationsandtargethighlyrelevantofferstoconsumersbasedontheirpurchasehistory.Thisapproachrequiresmulti-channelretailerstoshiftfromessentiallyoperatingseparateretailplatformstowardsone,integratedplatform.

fIGuRE 1. Complex Customer Journey

2.0 THE EvOLuTION Of OMNI-CHANNEL RETAIL

Right Person Right Offer

Deliver

Discover

Decide

Right Place Right Time Right Way

10

Markets differ in their digital retail maturity in terms of the share of online and mobile shoppingpenetration.Internetaccessisaprerequisitetoaccessingdigitalshopping.Whiledigitalaccesshasfastbecomeregardedasabasicnecessitybyconsumersinmanycountries,itisnotuniversal(Figure2).

However, smartphones and other devices offering mobile web access represent an advance towardsuniversalaccess.Theyarealsoagame-changerforconsumerbuyingbehaviour.

fIGuRE 2. Home and Mobile internet access, 2014

(PercentageofIndividuals)

Accompanying the evolution of omni-channel retailing is the growth of online sales. To some extentreflectingInternetpenetration,onlinesalesgrowthvariessignificantlyacrossmarkets.TheU.S.,U.K.andNordicmarketshave thehighestonlineshareof retail salesandalsoprovide themostaccuratedata.EstablishingtherateofgrowthandscaleofInternetsalesisdifficultasnotallmarketshavereliabledata.

Ireland

United Kingdom

Sweden

Spain

United States

EU 28

Portugal

Poland

Norway

Netherlands

Bulgaria

Italy

Hungary

Romania

Mobile Access (excluding home or work) Internet Access at home

Germany

France

Finland

Turkey

Denmark

Czech Republic

Belgium

Austria

100 20 30 40 50 60 70 80 90 100

THEEVOLUTIONOFOMNI-CHANNELRETAIL2

Sources: M. Meeker, 2015 Internet Trends; Eurostat

11

fIGuRE 3. online sales as percentage of retail sales*, 2014 and 2015F

Inaddition,theretailsalescategoryisabroadumbrellaandencompassesmanysalesandservicesthatwouldnotusuallybefeaturedinthetenantmixofshoppingcentresandmightbecharacterisedbyahighonlinesales component, for examplebetting shops, ticketingetc. TheCentre forRetailResearchhascompiledsurvey-baseddatathatquantifyonlineretailsalesincludingineightEuropeancountriesandtheU.S.,usinganarrowdefinitionofretailsalesthatbetterreflectsretailactivitieswithinshoppingcentres(Figure3).6However, it isworthnotingthatas thedataexcludefoodandbeverage(F&B)services,whichcannotbedigitised,theonlineshareoftotalsalesmaybeoverstatedfortotalspendingacrossshoppingcentres.

Usingthisnarrowerdefinitionofretail,theU.K.hasthehighestproportionofonlinesalesat13.5%in2014.Atlessthan3%,Spain,PolandandItalyhavethelowest,tosomeextentreflectingregionalisationinpenetrationratesandinthequalityoftelecomsinfrastructurebeyondmajorcities.TheU.S.achievesahighpenetrationrateapproaching12%.Lookingatspendingpercapita,U.S.consumersoutpacetheirEuropeancounterpartssubstantiallyatpercapitalevelsaveraging$1,815.52(€1,325.20/£1,119.79)comparedto$1,329.54(€970.47/£820.05)inEurope(Figure4).

fIGuRE 4. online spending per Capita

European Average

France

Sweden

Spain

Netherlands

Germany

Italy

2015F2014

Poland

United Kingdom

United States

20 4 6 8 10 12 14 16

EuropeUnited States

€ 1,400

€ 1,200

€ 1,000

€ 600

€ 800

€ 400

€ 200

€ 0


*Retail sales exclude autos, gas, tickets, and sales-weighted transactions.

Source: Centre for Retail Research

Source: Centre for Retail Research (2015)

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Insomeofthematureonlinemarkets,thereissomeevidencethattherateofgrowthofthesesalesisslowing.Individualretailers’performanceacrosschannelsdivergeswidely,dependingupontheirmarketshare,asseeninFigure5.Thoseretailerswhohaveestablishedthehighestshareofonlinesalesrelativetototalsaleshavethelowestratesofgrowthandviceversa,perhapsindicatingthatonlineasaproportionofstoresalesreachesanaturalplateauatwhichgrowthratesbegintomoderate.Thistrendisalsoevidentinthegrowthmomentumacrosscountriesinthenumberofindividualsmakingapurchaseonlineinthelastthreemonthsandthedeclineinthenumberofindividualswhohavenevermadeapurchasebetween2009andyear-end2014.(SeeFigure6.)Thosemarketswiththelowestpenetrationrates,likeSpain,arecharacterisedbythestrongestgrowthrates,andthisholdstrueacrossallretailsegmentswhereSpainisgenerallyindicativeofthistrendaswell.(SeeFigure7.)

fIGuRE 5. online as percentage of all sales and annual growth

fIGuRE 6. online purchase activity and growth, 2009-2014

Macintosh (NL)

Macy’s (US)

Nordstrom (US)

Media-Saturn (DE)

Williams-Sonoma (US)

Debenhams (UK)

Douglas (DE)

Lululemon Athletica (US)J Crew (US)

La FNAC (FR)

Empik (PL)

M&S (UK)

Next (UK)

Online sales growth Online sales share

Gap (US)Abercrombie & Fitch (US)

Footlocker (US)

John Lewis (UK)

Walgreen (US)

Tom Tailor (DE)

Mango (ES)

100 20 30 40 50 60 70 80 90 100

% Population

Bought online in last 3 months Never bought online

% Growth 09-14 % Population % Growth 09-14

European Union (28 countries)GermanySpainFranceItalyNetherlandsPolandPortugalFinlandSwedenUnited Kingdom

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%


Source: Property Market Analysis (PMA) (2015) based on company reports; Vertical Web Media LLC

Source: Eurostat (2015) ibuy survey

13

fIGuRE 7. online purchase activity and growth by retailer Category, 2009-2014

Given the symbiotic relationship between online, in-store and other channels such as catalogue sales,retailersareshiftingawayfromseparateprofitcentres.FocusingonthefinalPOSismisleadingasitmasksthemorecomplexcustomerjourneyunderlyingit,involvingmultipleconsumertouchpoints.Forexample,it isestimated that in theU.S.andU.K.over50%of in-storesalesareWeb influenced,withconsumersbrowsingandresearchingproductsandpeerreviewspriorandduringastorevisit.7

Equally,onlinesalesareinfluencedbythephysicalstoreaspartofthepre-purchasejourney,fulfilmentorpost-purchaseexperience.Thisholdstrueforeventhemostdigitallyactiveconsumers.AComscoresurveyonbehalfofUPSsolelytargetingveryactiveonlineconsumersfoundthatthestoreinfluencedthecustomerjourneyinupto60%oftheironlinesalestransactions(Figure8).


% Population

Food/groceries Household goods Clothes, sporting goods

% Growth 09-14 % Population % Growth 09-14 % Population % Growth 09-14

% Population % Growth 09-14 % Population % Growth 09-14 % Population % Growth 09-14 % Population % Growth 09-14

European Union (28 countries)GermanySpainFranceItalyNetherlandsPolandPortugalFinlandSwedenUnited Kingdom

250%

300%

350%

200%

150%

100%

50%

0%

Computer software Computer hardware Electronic equipment Digital media, software, music

250%

300%

200%

150%

100%

50%

0%

Source: Eurostat (2015) ibuy survey

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fIGuRE 8. role of store for High Frequency online shoppers

Foromni-channelretailers,whatmattersisthatthesaleoccurs,thatcustomers’experiencesarepositive,andthattheywillremainorbecomeloyaltothebrand.Customersexpecta‘one-customer,one-company’service,ademandthatexceedsmanyretailers’capabilities.

Thekeyforretailersisnotnew:todelivertherightproduct,attherightprice,intherightplace,intherightway,totherightperson.Thedifficultyisthattherightplaceisnowbothmorediverseandmoredynamic.Mostmulti-channelretailersunderstandtheimportanceofrestructuringtheirbusinessmodelstobettermeetthedemandsoftheircustomers.8

Omni-channelshoppingbehaviourrequiresretailerstomaturefrommulti-channelplatformstoanomni-channelorganisation,whichrequiresaconsiderableinvestmentininventorymanagementandinformationtrackingsystems.


Search online, buy onlineSearch online and in store, buy in storeSearch online, buy in store

Buy online, pick up in storeSearch in store, buy onlineSearch online and in store, buy online

U.S. Europe France Germany Spain U.K.

Search in store, buy in store

80%

90%

100%

70%

60%

50%

40%

30%

20%

10%

0%

Source: UPS / ComScore Survey, Europe (2015); UPS / Comscore Survey US (2015). Survey of online consumers (sample of respondents comprises 20% making 2-3 purchases, 40% making 4-6 and 40% making 7+ purchases on-line in past 3 months) ‘Thinking of purchases you make, both online and in stores, how often do you purchase in the following ways?’

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Shoppingbehaviourcontinuestoevolveastechnologybecomesmoreaccessible,morepervasive,morepowerfulandmoreintuitive.Retailersarerespondingbyrestructuringtheirbusinessoperationstobetterrespondtoconsumerdemandsandcapitaliseontechnologicalchange.

Thisreorganisationpermeateseveryaspectofthebusiness.Inadditiontoorganisationaltransformation,theevolvingomni-channelretailmodelalsohassignificantimpactsuponstoreportfolios’optimisationandthe

roleofthestoreitself.

3.1 from Multi-Channel to Omni-Channel Operations

Inordertotransformintoanomni-channeloperator,retailersmustintegrateallaspectsoftheirbusinessmodels.Nearlyallretailershaveincorporatedthisgoalintotheirbusinessplans,butfewhaveachievedfullintegrationatthispointintime.

Central to this is the integration of teams to enable a holistic approach to understanding customers,developing the retail proposition, selecting stock, tracking inventory, merchandising and marketingstrategies.Thisintegrationrequiresthewholesalerealignmentoftheoperatingmodelintermsofprocessesandsystems,teamsandperformancemeasurement,aswellastheredistributionofthecostbase.9

Traditional retailers’ investments in their online platforms are placing strains on the profitability andgrowthdemandedbypublicmarkets.Asaresult,only19%ofthetop250globalretailershavebeenabletodeliveraprofitableomni-channelstrategy10,whenonlineprofitmarginsarebrokenout.Thisconfirmstheassumptionthatmosttopretailersarenothighlyadvancedinrollingouttheirintegratedplatforms.

Most retailers are still catching up, with more experimentation required. Fulfilment and inventorymanagement,thekeystounlockingprofitability,representthetopprioritiesforthemajorityofretailers,requiringconsiderableinvestment.

Integratingplatformsinvolvethreemajorstages:

1. Effective inventory management and tracking.Retailerswitha largeonlinepresencemayoperateacomplexinventorysystemasalegacyofhavingparallelonlineandin-storeretailchannels.Thismayincludedistributionfromcentral,regionalandlocaldistributioncentresandfromstores.Managingthisinventory requires the creation of an integrated information technology system. For many retailers,establishingasystemthatensuresthattheretailerknowsthelocationofallofitsproductsonareal-timebasisissomethingtheymustgetright.Theabilitytodeliveraproductthatissupposedtobeininventorytoacustomer,whetherathome,in-store,in-storeforpick-up,oratotherdistributionpointsmustbeachievedaspromisedandinatimelymanner.Fulfilingsuchpromises,whethermadein-storeoronline,isessentialtobuildingcustomerloyaltyandtrust.Hence,inventorymanagementandfulfilmentareamajorfocusformanyretailers’capitalexpenditurescurrently.

2. facilitating fulfilment as inexpensively as possible. Fulfilment isa considerablecost for retailers.Amazon, the largest online retailer in the U.S. and Europe, has set the bar high with a large-scaleefficient fulfilment system and an aggressive growth strategy that frequently offers free shipping.11Itsheavyfocusondistributionisallowingittofurthershortendeliverytimes.Asaresult,traditionalretailersfeeltheneedtocompetewiththeirownlow-costorfreeshippingthatisalsoprovidedquickly.Viewedbyinvestorsas‘tech’companies,AmazonandotherInternet-onlyretailershavegreaterlatitudein favouring growth over profits.12 In contrast, traditional retailers are subject to meeting quarterly

3.0 RETAILERs’ EvOLvING busINEss MODELs

16

profithurdlestosatisfyinvestors,nomattertheirsuccessingrowingonlinesales.Currently,clickandcollectholds littlecostadvantageformanyretailersasonlineandphysicalstoresmayuseseparatecentralwarehousesandinventorymanagementsystems,requiringanitemtobedeliveredtothestoreregardlessofwhetheritisinstock.AccordingtoaBostonRetailPartnersDecember2014report,only24%ofretailershavesystemsthatworkwellforclickandcollect,and29%ofretailer’ssystemsworkwellforreturns.Integratinginventorymanagementalongsidedistributionmayunlockprofitability.

3. Integrating marketing and brand experience. Customers expect a seamless, cross-channel brandexperience.Storesareintegratingwithallotherchannelsandmustprovideuniformpricingandaccesstothefullmerchandisingrangeandmix,productandorderinformationandcustomerpreferences.Thisisapparentinthenumberofretailersthathaveequippedsalesassistantswithtabletsandotherin-storetechnologytoenablecustomers’accesstotheretailer’sfullrangeandinventory.Anexternalityofthishasbeentheblurringoflinesbetweenin-storeturnoverandonlinesales.

Increasingly,customersarealsoseekingtobeabletocontinuetheirshoppingjourneyinanyplace,whetheronlineorin-store,withouthavingtore-tracesteps.Thisrequiresallapplicationstobeintegratedandtobecapableofidentifyingindividualcustomersacrosschannels.Thelinkageofonlineandin-storecustomersmaybeachievedthroughmembershipofaloyaltyprogrammebycard,onlineordownloadedmobileapp,orincreasinglythroughanopt-inpushedtothecustomerthroughtheuseofWi-Fi,GPS/mobileandbeacontechnologythat interactsandtracksweb-enabledphones.Digitalstorefrontsanddisplaysare linkedtovirtualmarketingplatformusingQR(QuickResponse)codesandRFID (RadioFrequency Identification)taggingwhichcaninformandentertainthecustomerona24/7basis.Theseapplicationsgreatlyenhancemarketingopportunities,withtechnologyandsalesassistantsbothequippedtonavigate,directandassistconsumerspre-,duringandpost-purchase.

Combinedwiththeemergenceofpaymentviasmartphones,thesetechnologiesalsoliberatethepointofpurchase,providingcustomerswiththecapacitytotransactanywhereinthestore,removingtheneedforfixedormobilepaymentterminals.Suchtransactionsoccurdirectlybetweenthecustomerandretailer,ratherthanviaastorepaymentterminal.Thistrendisstillinitsinfancybutisexpectedtodevelopquickly.Lookingforward,theabsenceofcentralisedpaymentterminalswillfurtherreducetheowners’abilitytodemarcatein-storesales,althoughretailerswouldbeabletotrackthese.

Developing cross-channel customer insight is central to effective, cross-channel marketing. Figure9 illustrateshow the integrationof technology acrossplatformscould beused togreatlyenhance thecustomer experience and increase sales. Of course, the key is to ensure that customers benefit fromenhancedcustomerserviceandthatstrategiesarenotoverlyinvasive.13Forexample,acustomer’sentrancemaytriggeranotificationtotheretailer.Theorderisretrieved,thenheldatadesignatedcollectionpoint.Thisefficiencygreatlyimprovesthecustomerexperience,savingthatmostpreciouscommodity,time.

Suchcustomerinsightfromunderstandingthecomplexityofcross-channelshoppingbehaviourandhowitvariesbymoodandmode isvaluable for increasingbusinessprofitability.Most importantly, itallowsretailerstoclearlyidentifyandretainthenotional20%ofconsumersthatdeliver80%ofprofit.

RETAILERS’EVOLVINGBUSINESSMODELS3

17

fIGuRE 9. Extension of Customer Journey

Toachievethisrequiresbusinessaccountingandprofitcentrestobereorganisedtobetterreflecttheomni-channelbusiness.Thecustomerdoesnotcarewhereasaleisbooked,butdemandsexcellentincentivisedserviceatallstagesoftheshoppingexperience.Whereasaleisbookedisnolongeranindicationofallthefactorsthatcontributetothatsale.Increasinglysalesarebeingattributedtoprofitcentresbaseduponthegeographicalreachofstoresratherthanbyretailchannel.

3.2 store Portfolio Optimisation

Isolating the impact of omni-channel retail strategies upon store portfolios has been difficult, as theindustryhasfacedmultipleheadwindsintheaftermathofthefinancialcrisisinboththeU.S.andEurope.Over-indebtedconsumersfocusedonpayingdownunsecureddebtandreplenishingsavings,andcreditavailabilityreceded.Austeritymeasuresreducedpublicspending,resultinginjoblosses.This,combinedwithfreezesinpublic-sectorpaylevelsacrossmanymarkets,ledtodecliningincomeinrealterms.Thiswasexacerbatedbysharplydeclininghousepricesinmarketswherepersonalgainsinwealthfromapre-crisishousepriceboomhadhelpedtofuelretailspending,mostnotablyintheU.S.,theU.K.,Spain,IrelandandPortugal.Retailspendingdeclinedandrefocusedonvalue,withdiscountretailersandexpandingnon-foodsegmentsofsupermarketretailersbeingtheprimarybeneficiaries.

Thegrowthofmulti-channelretailingoverthisperiodprovidedretailerswiththeopportunitytoreducetheirfixedcostsbyrationalisingtheirstoreportfoliostostemdwindlingprofitmargins.Insomelocationsthishasresultedinsomesecondaryretaillocationsbeingperceivedasobsolete,whileinmany,rentallevelshavebeenrebased tomoresustainable levels in linewith retaileraffordability.Theresultingweaknessof consumer demand, together with over-leveraged retailer business models, left the sector exposed.Consequently, vacancy rates increased in secondary centres in Spain and in non-prime high streets intheU.K.IntheU.S.,thereisawell-establishedunderstandingthatlower-qualityretailspacemayneedtobe repurposed, renovated,or redeveloped.Similar trendsapply foropen-aircentres,particularly thoselocatedontheurbanperiphery.


Consumer on-line search; purchase options could include click and collect.

Click, try, buy

Personalised welcome and marketing

on entering store;service options

Orientation and Augmented Reality to areas / items

of interest

Synching with consumers’ apps

(for review & advice)

Internet of ThingsPayment

Review relevant offers and recommendations

COOL, NON-INVASIVE

Source: Adapted from McKinsey, ‘Digitizing the Consumer Decision Journey,’ June 2014

18

Thishasledtoretailerandinvestorretrenchmenttoprimelocations,destinationshoppingschemesandretailcentresthatdominatetheircatchmentarea.Thecontinuedgrowthofonlineretailingoverthesameperiodexacerbatedtheimpactofdecliningin-storespendingpatternsandfacilitatedstructuralchange.

However,oneoftheprincipaldriversofretaildeclinewastheinabilityofover-indebtedandover-expandedretailers towithstandsharplydeteriorating retail spendingpatterns.Online retailingaggravated ratherthancausedthedownwardretailspiralinsecondarylocationsandcentresintheU.S.,SouthernEuropeandtheU.K.

ThatexperiencediffersfromtheNordicmarkets,whereonlineretail isarelativelymaturesector,havingfirstemergedinthelate1990s.Betweenyear-end2007andyear-end2012,Swedenexperienced5.6%incompoundannualgrowthrate(CAGR)innominalonlinesales,overtwicetheCAGRforallretailsaleseveninnominalterms.14

Over the same period, retailer demand strengthened and the requirement to rebase rents in line withaffordabilityprevalentacrossmanyEuropeanmarketsdidnotarise.Indeed,primehighstreetandshoppingcentre rental levels increased by 7.0% since the previous market peak in 2007; growth in secondaryshoppingcentrerentallevelshasbeenmarginallystrongerat7.5%.Themarketexperiencedashortandlesssevereeconomicdownturn.

Putsimply,retailershavefounditeasiertogetasmallerpieceofabiggercakeinSwedenthantogetabiggerpieceofasmallercakeintheU.S.andotherEuropeanmarketssuchastheU.K.

Nevertheless, asomni-channel retail continues toevolve, the structureof the retail landscapewill adaptandrespond.Retailersaremergingtheirphysicalandonlineplatformstoincreasetotalsales,lowercostsandimproveservicelevelstocustomers.Increasingsophisticationinpersonalonlinemarketinganddeliverychannelsalsoenablesretailerstoreachtheircustomerbasewithareducedphysicalstoreportfolio.

Retailers have shifted store expansion strategies to conquering principal cities, rather than countries,reflectingthegreatermarketingreachofflagshipandmajorstores.15Thesizeofappropriatestoreportfolioswillvaryaccordingtothescaleofthemarketandthecharacteristicsoftheretailerwithregardtosectorandtargetaudience.

Aspirational retailersmayseek toconstrainstoreportfolios tohelpprotectandextend thescarcityor‘wow’valueassociatedwiththebrand.Atthesametime,theprovisionofomni-channelenablesflagshipandmajorstorestohaveamuchdeeperreachandsphereofinfluencethanpreviouslyachievable.Otherretailersmayrequirealargerstoreportfolio,buttheyarechangingthestrategyonthesizeandnumberofstoresrequired.Forsomeretailers,thismaymanifestitselfinareducedstoreportfoliobynumberofstoresandreductioninstoresizeinsecondarylocations,balancedwithincreasedlargerflagshipstores.

The larger stores enable the retailer to showcase products and focus on engaging consumers throughexcellentcustomerserviceandbrandexperience.Forothers,theoppositemaybetrue,assizewasreducedbutthenumberofstoreswas increased,providingmorephysicaltouchpointstoengagewithconsumers.Moreover,manyretailersarecreatingamoredefinedstorehierarchywithintheirportfolios,demarcatedbythefunctionorpurposeofoutletsindifferenttypesoflocations.

Since the onset of the downturn, retailers have largely pursued polarised store portfolio strategies.Securinggoodqualityspaceinperceived‘A’locations,includinglarge,destinationshoppingcentresandprimehighstreetsinEuropeandupscalestreetfrontretail intheU.S.,wastheprincipalobjective.Suchlocationsprovidedtherequiredcriticalmassofco-locatedappropriateretailers,qualityofenvironmentandtherequiredaccesstoaconsumeraudienceatarequiredscaleandquality.


Nevertheless, as

omni-channel retail

continues to evolve,

the structure of the

retail landscape will

adapt and respond.

19

Demandforwhatremainsafinitenumberoflocationshasexceededsupply,andrentsforsuchspacehaveincreased.Theuseofthisspaceismulti-faceted.Inadditiontodrivingstoresales,retailersarekeentousethishigh-profilespacetobuildbrandsthroughshowcasingproductstoengagewiththeirconsumersinaface-to-faceinteraction,providingexcellentcustomerserviceandcomplementaryservicestocustomers.Expensivestorefit-outsareacentralpartofthisretailtheatreandbrandbuilding.Asaresult,retailersreportthatonastoresalesbasis,profitmarginsareunderpressure,despitestrongtop-linesales.

However,thestoresareanimportantdriverofsalesacrossthewiderstorehierarchyandalsoonline.Astherecoveryinmostregionaleconomiesgainstraction,someretailersarebeginningtocautiouslyexpandintogood-quality,butlower-cost‘B’locationsthatareabletofeedoffflagshipandmajorstoresandassistindrivingprofitability.Unlike ‘A’ locations,whatconstitutesa ‘B’ location ismuchmorevariableacrossretailersgivendifferencesinproductrange,targetaudienceandpricingstrategies.Asaresultthecostofspaceintheselocationsisunderconsiderablylesspressure,allowingforhigherprofitmarginsforretailerswhoperformwellinsuchcentres.Inaddition,excessspaceinthesestorescanprovidelocalisedfulfilmentopportunities.

Storeportfolioshavealsoplacedasecondaryfocusonpropertiesthatprovideorfacilitatebrandawareness,convenienceandimpulsepurchases.Importantly,thesestoresofferaneasyaccesspointforconsumerstointeractwiththebrand,retrieveknowledgeandserveasacollectionand/orreturn-of-goodspointboughtonline.Again,thefocusisonexceptionalcustomerservice,withanemphasisonconveniencetomaximisetheutilityofaconsumer’stime.

3.3 Purpose and value of the store

The extension and greater complexity of consumer journeys characterising omni-channel shoppingbehaviourhaveincreased,ratherthandiminishedtheroleofphysicalstores.Mostretailersnowrealisethatthephysicalstoreisthecornerstoneoftheiroverallomni-channelretailoperation.ThevaluetothebusinessisnowconsiderablymorecomplexthanamerePOS.Strongsynergiesbetweensaleschannelshavebeenevidencedbyincreasedonlinesalesinmarketswheretheretaileropensastore.Longvaluedbyluxuryfashionretailers,thephysicalstoreisnowalsoviewedbyevenmid-marketretailersasakeytobrandingandshowcasingproducts.Thisspacemustbeexperientialinawaythatestablishestheimageandbrandoftheretailer,whilealsoshowcasingitsproductsinawaythatdrivessales.Whetherthesalethenoccursattheregister,asanonlinesalepickedupinthestore(clickandcollect),asasubsequentonlinesale,asanin-storeonlinesalethroughasmartphone,tabletorkiosk,orasareturn/exchangeofanonlinepurchasedoesnotmatter to themodernretailer.Thestorealsoprovidesa ‘haloeffect’ in the locality,creatingbrandawarenessfromitspresencethatcanpositivelyimpactonlinesales.

Theretailer’sobjectiveistodrivesales,whileestablishingcustomerloyaltyandbrandingfor long-termsuccess.Atitsextreme,certainretailershaveretainedseeminglynon-performingstoresbecauseoftheirimportanceandsynergistic relationshipwithonlinesalesvolumes in thecatchmentarea.Anumberofstudieshaveindicatedthatonlineandin-storesalesbenefitcumulativelyfromanintegratedoperation.16Recognisingthis,manypure-playretailershaveandareopeningphysicalstorestoenhancetheirbrand.17


Most retailers now

realise that the

physical store is

the cornerstone

of their overall

omni-channel retail

operation.

20

The major shopping centre owners in Europe and the U.S. have also fundamentally restructured theirbusinessestomeettheneedsoftheircustomers—bothretailersandconsumers.Thespeedofchangeisimpressive.Giventhatretailandtechnologicalchangeremaindynamic,ownersremainagile.Therearethreeprincipalareasofbusinessrestructuringanddevelopmentfortheseowners:portfoliospecialisation,place-makinganddigitisingthebusinessmodel.

4.1 Portfolio specialisation

Mirroringretailers,thedemandforshoppingcentreinvestmentshaspolarisedbetweenlarge,destinationcentresand,neighbourhoodandconveniencecentres.IntheU.S.,demandisalsostrongforbothtypesofcentres,althoughinvestorssegmentthesetypes.Demandissomewhatdifferent,however,forsecondarycentres and secondary locations with weak performance. While retailers have developed stratifiedportfolios,ownershaverationalisedportfoliosandtendedtospecialiseinaparticularsegmentoftheretailhierarchy.IntheU.S.andEurope,thelargestpublicREITsandlargeinstitutionalinvestorshavefocusedonprimeassetsandhavebeencullingweakerperformers.

InboththeU.S.andEurope,dominantdestinationcentresareparticularlyfavouredbythelargestshoppingcentre owners and investors. In both regions the ownership of destination and experience centres isbecomingincreasinglyconcentratedduetomergersandacquisitionsamongprivateandpublicpropertycompanies,investmentfirmsaswellasaggressivepropertyacquisitions.Thesehigh-qualityassetsdrawfromasubstantialaffluentpopulationandhavebenefittedfromstrongretailerdemand.

Suchownersspecialiseindestinationretailandengagingconsumerswithstimulatingenvironmentsandexperiences,supportedbyoutstandingcustomerserviceandfacilitiesthatmaximisetheutilityandqualityoftime.Inmanagingthesecapital-intensiveproperties,ownersareincreasinglyestablishingarecognisedbrandofownershipforthecentrethroughmoreextensivemarketingeffortsthanwerethenorminthepast.Someownersarecarryingthisbrandingevenfurther,establishinganationalorglobalbrandfortheirportfolioofproperties.

Asecondgroupofownersspecialisinginconvenienceandneighbourhoodschemesisidentifiable.Thesecentresmaybesmallenclosedmalls(morecommoninEurope)thataredominantandwell-locatedintheircatchmentoraccessibleopen-airformatsthatagainseektomaximisetheutilityoftimeforconsumersthroughensuringthattheexperienceoffulfilingconsumerneedsandrequirementsisconvenient,easyandsupportedbyexcellentservice.Thisincludestheco-locationofappropriateservices.Strongercentresare typically owned by public and private companies quite separate from the large destination centreownersandbyotherinstitutionalinvestors.

Beyond the spectrum of experience and convenience, retailer demand for mid-sized centres in Europehasbeenconsiderablylower.Theimpactonpricinghasresultedinlowcapitalinvestmentformanysuchschemes.IntheEuropeancontext,PropertyManagementAnalysis(PMA),asupplierofrealestatedataandanalysisfortheregion,hasreferredtothiscohortasthe‘squeezedmiddle.’(SeeFigure10.)Whilesomeweakschemesincompetitivecatchmentsmaybechallenged,othercentresinstrongercatchmentsthatbenefitfromamoredominantpositionmaysimplyrequirere-positioningwithinthenewretailhierarchy.

4.0 sHOPPING CENTRE OWNERs’ EvOLvING busINEss MODELs

21

fIGuRE 10. ‘squeezed Middle’ schemes Built pre-2005 By refurbishment / redevelopment status

4.2 shift from space-Making to Place-Making strategies

Manyownersrecognisedbythelate1990sthatretailenvironmentsneededtoprovideconsumerswithanexperiencethatgreatlytranscendedtransactionactivity.IntheU.S.,thiswaspromptedbyabove-averagesupply in some areas, renewed interest in high streets or downtowns, and the emergence of lifestylecentres.InEurope,itwasinitiallypromptedbyasocio-culturalconsumershiftfrom‘need’to‘want’andtheappreciationofthevalueoftime.Theevolutionofmulti-,andlateromni-channelretailfurtheracceleratesthisshift.ItalsomadesuchchangeevenmoreimperativeintheU.S.

Insuchenvironments,shoppinghasbecomenotmerelyameanstoanend,butanactivitytobeenjoyedinandofitself,regardlessoftheoutcome.Shoppingcentreownershavefollowedtheleadofsuccessfulretailers, who inspired by Apple, have used their stores as places to entice, excite and connect withconsumers.Asaresult,ownershaveshiftedfocustowardscreatingauniquesenseofplaceandsocialspacethatstimulatesallfivesenses.Thishasmajorramificationsforshoppingcentredesign, includingthescaleandfunctionofpublicspaces.

Customersaredrawn toa retaildestinationby thesocialactivities, ‘edutainment,’ leisurepursuitsandrelated events that it offers as much as by the presence of retailers. This transforms the role of theshoppingplacefromafairlypassivephysicalentitytoanactive,civicentitywithasenseofplacedistinctfromwhatisofferedbyretailers.Retailerswillneedownerstocreatethemarket-placeatleastasmuchas owners need them. By creating a shopping place, not merely shopping space, the owner has theopportunitytoharnessthebrandvaluecreated.

Thisisasignificantshiftinthetraditionalrolesofownersandretailers.Formerly,theshoppingcentreownerprovidedawell-locatedand-designedvenueforappropriateretailers.Theownermanagedthetenantmixtodriveconsumerfootfallandsales.Managementfocusedonunderstandingtheagglomerationeconomicsofco-tenanciesinordertomaximisethepowerofthetenantmix.Asidefromadvertisingcampaignsandperhapsconsumerresearch,theowner’srelationshipwiththeconsumerwasindirect,withretailersbeingresponsiblefordirectlyengagingconsumers(Figure11).

France

United Kingdom

Italy

Germany

Spain

Poland

Unchanged Upgraded To be upgraded

500 100 150 200 250 300 350

SHOPPINGCENTREOWNERS’EVOLVINGBUSINESSMODELS4

Source: Property Market Analysis (PMA) (2015)

22

fIGuRE 11. Traditional shopping Centre Model

Inatransferofresponsibilityfromretailertolandlord,ownersaredirectlyengagingconsumersthroughplace-makingstrategiesthathelptodrivecustomerflowtoretailers.Ownersseektodrawtheir targetaudiencetothelocationalongthecontinuumbetweencivicplaceandsocialspace.Thecreationofa‘civicplace’enablesretailtobebetterconnectedtobroadereconomicandsocietalpursuits.Althoughasenseof ‘social space’ isalso important forconveniencestrategies, itwilldominateexperience-and leisure-orientated retailing. Feelings of ownership and belonging are encouraged through spaces and servicesthat,byenhancingconsumers’well-being,allowthemtotranscendtheirpurchasedecisionandfacilitatediscretionaryspending.Inbothcases,theenvironmentwillfosterasenseofcommunitycohesion.Doingsowillrequireownerstodelivertangibleaddedvaluefortheirshoppers.

Related to this, for many consumers, time is their most valuable resource. Co-locating and deliveringservicesand/orexperiencesthatmaximisetimewillunderpincustomerexperience.Strategies,again,willdifferacrossdifferentcentretypesandcustomerprofiles.Forexample,convenience-ledcentresmayco-locatecivicorothernon-retailserviceswithinanon-coreretailspaceinthecentre,reducingthetimethatcustomersrequiretoundertakechores,aswellasplacingretailnearwhereconsumershavetobe.Equally,leisure-basedshoppingcentreswillneedtoprovidetheconsumerwithanexperiencethatcandelivermorethancompeting leisurepursuits.Thisrequirestheprovisionandco-locationofservicesthataddtothecustomer’ssenseofwell-beingandhappiness(forexample,personalisedservices,centralisedcollectionpointsforshopping,etc.).Figure12attemptstodepictthisevolvingstateofaffairs.

Leasingstrategiesalsoidentifyandcourtretailbrandsthathaveasignificantimpactonfootfall(includingtootherretailers).Thiscreatesahierarchyofcooperative,collaborativeandco-dependentrelationshipsbetweenownersanddifferenttypesofretailers,andamongretailersthemselves.


TRADITIONAL CONTEMPORARY

consumers

Engaging

Socialspace

EnrichingEmot

iona

l

retailers

owner

Provide retail stores,basic services and

maintain public services

Purchase products and services

Provide retail stores,manage centre, provide

and maintain basic public services

Pay rent and service charges

Citizens

OwnersRetailers

Deeper customerrelationships transcend

physical and virtual

Creation of social space and civic place with potential for new

income streams

Synergistic store andcentre response to real-time customer analytics, offering

new B2B services

Sources: RHL Strategic Solutions (2010); Milligan Retail (2010)

23

fIGuRE 12. social space and Civic place

Whilstonceconcentratingonprovidingretailerswithanexcellentspaceinagreatlocationwithsuperbco-tenancies,today’sownersincreasinglycreateavenuethatattractsconsumersandenablestheretailertofullyestablishitsbrand.Progressiveownersandmanagersareadeptatharnessingtechnologytofacilitatetheirobjectives.

4.3 Digitising the business Model

Theevolutionof the roleof technologywithinshoppingcentreownerbusinessmodelsmirrors thatofretailers.Initiallysetupasastand-alonedepartment,usuallywithinthemarketingdepartment,digitalisnowfullyintegratedintoeveryareaofthebusiness.DigitalrunsthroughtheDNAofre-fashionedbusinessmodelsanditsroleandimportancemaybesummarisedinfourinter-relatedobjectives:

4.3.1 Customer Experience

Mostownershaveinitiallyfocuseddigitalstrategiesondevelopingapplicationsandservicesthatgreatlyenhancethecustomerexperience.Thesemightincludeashoppingcentreapp,withorwithoutanassociatedloyaltyscheme.Theaimofsuchapplicationsistocreateacustomerexperiencethatisengaging,easyandconvenient.(Forexample,way-findingappsand/oraugmentedrealityprovideautonomousway-findingforconsumers.)

Equally,theabilityto locateavehiclewithinthecarparkonaninteractivemapand/orpayforparkingby mobile device enhances the customer journey. The appropriate provision of smart retail walls and/or installationof interactivewallsandmagicmirrorswithin themallorwithincertainstores,mayalsoenhancethecustomerexperiencebymaximisingtime.


Sources RHL Strategic Solutions (2010); Milligan Retail (2010)

Well-BeingSelf Actualisation – I am what I feel

Discernment – I am what I own

Social – I am one of you

Safety – I am comfortable

Basic Needs

Premium Brandsand Services

Fashion Trends, CosmeticEnhancement, Social Interaction

Basic Wardrobe Staples, Personal Grooming, Child Care

Food, Health, and Household Chores

Belo

ngin

gPe

rson

alis

ed

Serv

ices

, Re

stau

rant

sLa

test

Bra

nds,

Beau

ty C

linic

s, C

afes

Beau

ty T

reat

men

ts,

Kids

Clu

b, G

ym

Clic

k &

Col

lect

, Ret

urn

Serv

ices

;

Hou

seke

epin

g Se

rvic

es;

Oth

er N

on-R

etai

l Ser

vice

s

Social Space

Civic Place

24

4.3.2 Enhance sales

Shopping centre apps that provide customers with readily accessible information have been quicklyrecognisedasanimportantsales-drivingtool—forexample,byrewardingcustomerswithafreeadditionalhourofparkingorwithacouponforarefreshment.Similarly,dwelltimecanbeextendedthroughretailers,who can collaborate with owners to distribute vouchers or push a marketing promotion. Most ownersstresstheimportanceofgivingtheconsumerautonomyintheselectionofofferstheyarewillingtoreceivesothattheyarenotoverwhelmedbycommunications.

4.3.3 Customer Insight

Ownersareexperimentingandinvesting innewtechnologiesandservicesthatwillhelpthemtobetterunderstandtheircustomers’valueandanticipatetheirwantsandneeds.Traditionalmethodsofresearchhavenotbeenabandoned,buttheirlimitationsarebecomingmoreapparent.Thesetoolshavetypicallybeencustomercountersatmajorcentreentrances,atentriestostores,inhotspotswithincentres,interceptinterviewsandfocusgroupsessions.Establishedsystemsforcountingshoppersatentrieshavenumerousaccuracyproblems.18Mostcountersprovidenoinformationonthequalityofshoppers,theirtravelpatternsordwelltime.Interceptinterviewsandfocusgroupsessionscanprovideconsiderablymoreinformationonshopperidentityandpatterns,butareexpensiveandconductedinfrequently.Inaddition,theytendtooverweightshopperswithtimeontheirhands.

Digitalsolutionsarenowbeingexaminedtobuilduponthesetraditionalresearchtools.Mirroringretailerstrategies,innovativeownersaretrackingconsumersusingavarietyoftechniquesincludingWi-Fi, beacons,andGPS/mobile devices(celltowers).19Thusfar,thevarioustechnologiesallhavelimitationsregardingtheinformationgatheredasthisindustryofvendorsisstillinitsinfancy.However,therangeofdigitalsolutions,aswellasthecoverage,accuracy,sophisticationandcapabilityofexistingapplications,isexpandingrapidly.

Wi-Fi trackingisusedtotrackcustomerflowandgenerateheatmapsinrealtimeacrossthecentre.Beinglinked toan individual’sweb-enabledphonealsoallowsdwell times tobecalculatedand isparticularlyusefulforunderstandingthecontributionandpeeloffratesofanchorstoresandothermajorretailerstothecentre.Alimitationofthetechnologyatthispointisthatitisonlyaccuratewithina7-metre/22-footrange,whichmeansdataoncustomerjourneysandpeel-offratesfromthecustomerflowofoneretailertootherretailersinthecentreisnotgranular.

Beacons provide greater accuracy. Initially quite expensive, the technology is becoming increasinglycosteffective.Dependingon theconfigurationof thebeacons, thesedevicesarecapableof trackingaweb-enabled phone regardless ofwhether Wi-Fi is turned on.The greater trackingaccuracyallows fortherelationshipsbetweenretailerstobeanalysedandmeasured,withthenetcontributionofindividualretailers to customer flow being quantifiable. This allows owners to identify those retailers that reallyaddvaluetoacentreandthosethatbenefitfromit.GenerallyintheU.S.,shoppersarenotautomaticallytrackedandthelegalperspectivecanvaryacrossstates,withdigitaltrackingrequiringcustomerstoopt-in. (Thesamesituationcanbeobservedbetweencountries inEurope.)This could include the shopperdownloadingtheretailer’sorshoppingcentreowner’sapp.

EachmobiledevicehasauniqueIPnumberwhichallowsownerstoidentifycustomerretention/loyaltyrates,frequencyofvisitsand,whererelevant,whethertheyshopatotherdestinationswithintheowner’sportfolio.Trackingcanexplainmovement,butprovidesnoinformationaboutcustomersortheirspendingpatterns.Wherecustomerswithsmartphonesopt-intoashoppingcentresystem,perhapsbyacceptingfreeWi-Fi,or


25

downloadinganapporotheroffer(suchasagreeingtobepartofaVIPclub),ownersareabletogainfurthercustomerinsightbyaskingforpersonalinformationona‘givetoget’basis.Thesebeaconcapturesallowanownertodevelopamuchbetterunderstandingofconsumersandtheirinteractionwiththecentre,andstarttoidentifyapreciseconsumercohorttotarget.

GPS/mobile technologiesprovidemuchthesameinformationasWi-Fibutcantrackshopperdemographicson an aggregate basis. However, most vendors rely on only one telecom service for this tracking and,therefore,coveronlyaportionofshoppers.Inadditiontocapturingconsumerflowwithinacentrefromtriangulationofdeviceswithcelltowers,additionalinformationastowhereconsumerswork,liveandwhereelsetheymightshopcanbeprovidedatanaggregatelevel.Thisassistsindevelopingsocio-demographiccustomerinsights.

Websitecapabilitiesdevelopedbyafewownersallowsmallerretailerscost-effectiveaccesstoatransactionalonlinemarketplace,andprovideconsumerswithaccesstostoreswithinthecentresona24/7basis.20

Theperceivedvalueoftheseplatformshasalwaysbeenlessaboutthesalesvolumesgeneratedandmoreabouttheirmarketingvalue.First,ownersdevelopveryvaluableoperationalknowledgeofandexpertisein both online enterprise and customer relationship marketing. Second, when a portfolio is relativelyhomogeneousinscaleandpositioning,acompanycanmoreeasilybuildaconsumerbrandwithappealacrossallitscentres.

However,emergingtrackingtechnologiesgreatlyincreasethevalueoftransactionalwebsitestoowners,byfurtheringtheunderstandingoftheomni-channelbehaviourofcustomersandmostimportantly,theirspendingpatterns.Linkingthistoshoppingcentretrackingdataallowsowners—likeretailers—tobegintoidentifythenotional20%ofconsumersthatgenerate80%ofprofit.

4.3.4 Retailer Relationships and Revenues

Thecustomerinsightderivedisalsovaluabletoretailerswithinthecentreandthoseconsideringopeningastore.Mostownersareusingtheiranalysistostrengthenrelationshipswithretailers,andasatooltoexplainandsupportassetmanagementinitiatives.Understandingsynergieswithotherretailersandtheirrelativeperformancewithinthecentreisvaluableknowledgetotheowner.Anumberofownerswillcollaboratewithretailersanddevelopmarketingplans,includingdigitalstrategies,toremedychallenges.Currently,mostownersdonotchargeforthisservice.However,somearebeginningtocapitaliseontheirknowledgebase,customerengagementandmarketingexpertiseandaredevelopingvalue-addedcustomer insightandmarketingservicesforretailers.Suchservicesprovideanewrevenuestreamandthecapabilitylowerstheriskandheightensthebrandvalueofthecentre.


The perceived value

of these platforms

has always been

less about the sales

volumes generated

and more about

their marketing

value.

26

Throughout Europe and the U.S., macro trends, including and facilitated by technological change, aretransformingtheshoppingcentreindustry.Thecreationofplacehasusurpedthedevelopmentofspaceforbothownersandretailers.Thetransformationofretailingfrommulti-toomni-channelhasmadethischangeevenmoreurgent.Thisshiftinemphasisisalsochangingthestructureofleasestrategiesinregardto tenant mix, lease length and income security, and in the development of services and new revenuestreams.

5.1 Tenant Mix

Shoppingcentreownersandmanagersinterviewedexplainedthatomni-channelretail,inconjunctionwithwiderstructuralchange,ishavingasignificantimpactontenantmixstrategies.Suchchangeisevidentacrossallcentres,althoughtheimplicationsfortenantmixvarywiththetypeofcentre.Althoughthesechangesareneitherrecentnorsolelydrivenbytechnologicalchange,thegrowthofomni-channelretailingisacceleratingthetrend.

All markets report a sharp increase in F&B as a proportion of gross leasable area (GLA) in centres. TheproportionofGLAdedicatedtothisuseinEuropeanshoppingcentreshasalreadyincreasedfrom11%to15%,withnewdevelopmentsandrefurbishmentsindicatingafurtherriseto20%.IntheU.S.,higher-qualitymallsandlifestylecentresareatthehigherendofthisrangeandopen-aircentresatthelowerend,andbotharegrowing.ThisincreasingallocationofspacetoF&Bisveryimportanttodestinationandexperiencecentres.Untilrelativelyrecently,theroleofF&Bwithinashoppingcentrewastoassistinextendingdwelltimebyenablingconsumerstorest,re-fuelandre-charge.Currently,theF&Bofferisbeingusedasamajordriveroffootfalltodestinationandexperiencecentres.Asaconsequence,itisnotmerelythequantityofspacethathasaltered,butalsotherangeandhigherqualityofoperators.

ShoppingcentreownersandmanagersareenhancingtheF&Bcomponentofthecentretobuildbrandandengagetargetconsumers.Traditionalfoodcourtsarebeingreplacedorsupplementedwithhighqualityfastcasual,markethallandupscale full-service localand regionaloperators.Therehasbeenageneral shift inleadingedgecentresawayfromgenericnationaltomorelocaland‘authentic’outlets.AlthoughF&Boperatorspreferlonger-termleasesrangingfrom10to15years,anumberofownersindicatedthattheyareretainingasmallproportionofF&Bspaceonshort-termleasestoprovideamoredynamicofferthatkeepsthecentre’sconsumerappealfresh.

Specialty leasinghasbecomeamuchmoreprominentcomponentofacentre’sleasingstrategythaninthepast.Historically,itsfocuswasoncartsandfindingtemporaryorseasonalretailerstofillotherwisevacantspace.Today,itisbecomingamorecentralstrategytoattractunique,start-up,alternativeor‘pop-up’retailers(andsometimesbrandedretailers)aspartofitsdirectivetoimprovenetoperatingincomeandmerchandisingvarietythroughfee-based,short-termlicensingofspacewithintheshoppingcentre.

Whileownersaregenerallylaunchingthisinnovativeretailerstrategy,third-partyintermediariesarealsoemerging,suchasAppearHereinEuropeandStorefrontintheU.S.Bothcompaniesprovideinnovativesolutionsforretailspace,providingstart-upconceptsandpop-upstores.Someownershavealsocreatedco-workingspacewithinthecentre,rentingsmallworkareasandconferenceroomstobusinesses(includingretailers,entrepreneursandstart-ups),furtherestablishingasenseofplace.Thisisalsoanopportunitytonurturetheretailersofthefuture.

Inallcasesofspecialtyleasing,amorecontemporaryviewisbeingunderstoodoftheworthofretailspace,recognisingtheinherentvalueoftheadvertisingbillboarditrepresentsandhowthisconsumerinterfaceopportunitycomparestobrand-buildingspaceelsewhere,includingonline.

5.0 CHANGING LEAsE sTRATEGIEs

specialty leasing

has become a much

more prominent

component of a

centre’s leasing

strategy than

in the past.

27

Auniqueandexperientialstrategyisalsoevidentwithinoverallretailmixstrategies,withownersadoptingmoredynamicleasingstrategies.Eveninexpensivehigh-qualitycentres,ownersaredevotingasmallbutsignificantpercentageofspacetowardsembryonicretailers,includingnewandtestconceptsfrommajornationalandinternationalbrands,localestablishedindependentretailersand/orpop-uporstart-upshopswithaviableandscalablebusinessplan.Pop-upshopsareusedtocomplementratherthancompetewithexisting retailersandcanprovidea central attractionuponwhichwider retailerandcentremarketingstrategiescananchortofurtherenhanceappeal.

WithinEuropeanconvenienceandneighbourhoodcentres,highlyregardedlocalprovenanceretailersarebeneficialtocustomerflowandtoincreasingcustomerengagement.Pop-upshopsfromaspirationalorinnovativebrandsalsoprovidetheopportunitytocreateeventsthatmaybetiedintowiderlocaland/orregionalinitiatives.IntheU.S.,neighbourhoodandcommunityretailercentresaregenerallyanchoredbyamajornationalorregionalgrocer,whiletheshopspacehaslongbeendominatedbylocalretailerswhotargetlocalneeds.Inresponsetothislocaldemand,anincreasingallocationisbeingmadetoF&Btenants.

InbothEuropeandtheU.S.,destinationandexperiencecentresarealsoincreasingallocationstoleisureandentertainment.Attractions, includingpop-upvarieties, arebeingused todrive footfall andextenddwelltime.Similarly,certainspecialistretailersthathaveastrongbrandandinnovativeentertainingstoreconcept,yetlowaffordability,arealsorecognisedasprovidingavaluablepointofdifferenceforcompetingcentres. Although the affordable rent level of such stores may be low, their positive contribution tocustomerflowasaleisureattractioninadditiontobeingaretailerisrecognised.

Theprovisionofmorefavourable leasetermsforretailersthatgenerateverystrongconsumerfootfallisnotnew.Anumberofownerscommentedthatthevariationinrentalagreementsaccordingtobrandstrengthisincreasing.

However, the increased sophistication of consumer tracking within centres is also improving owners’understandingofthecontributionofindividualretailerstothecentre.Ownersandconsultantscommentedthat a number of retailers that benefit from attractive lease terms do attract strong footfall to theirstores,butcustomeranalyticssuggestthatthereislittleevidenceofsynergywithotherretailersacrosstheshoppingcentre.Moregranularanalysisofcustomerflowsallowsownerstobetterunderstandthesynergisticvaluethatindividualretailersbringtoacentreinadditiontotheiranalysisofdirectsales.

Place-making is at the heart of re-engineered shopping centre strategies and owners are integratingservicesintothetenantmixtodeliveronexperienceandconvenience.Indestinationcentresthisoftenincludes theco-locationofgymnasiums,spas,medicalclinicsandnon-surgicalcosmeticclinicsaswellascustomerservicessuchascollection lockersorcentralisedshoppingservices thatareusedtohelpcustomersmaximisethequantityandqualityoftime.

IntheU.S.,ownersofopen-aircentresarealsoaddingamenitiesincludinggatheringareas,increasingF&Bincludingpopularfastcasualdining,coffeebars,fitnesscentres,anduniqueandinterestingretailers.Insomecases,fashionretailerswhotraditionallylocateinmallscanbeattracted.IntheU.S.,powercentres/bulkygoodsretailparks,whichhistoricallyhavebeenafunctionalgatheringofdiscountretailers,areinsomecasesbeingsupplementedwithalifestylecomponentand/orgrocerystore.ThelifestylecomponenthasapleasantpedestriangatheringareasurroundedbyF&B,cinema,apparelandotherspecialtyretailers.

InEuropeanconvenienceandneighbourhoodcentresandinU.S.neighbourhoodandcommunitycentres,servicesarearisingproportionoftheretailmix,includingopticians,dentists,drycleaners,medicalclinicsandpersonalgrooming/beautyclinics. Inaddition,anumberofownersareexperimentingwiththeco-location ofpublic services asameans ofplacing the shoppingcentreat theheart of the civic centreorcommunity.Forexample,theco-locationofmajormedicalhealthfacilities,governmentoffices,adulteducationorpubliclibrariesisbeingtried.

CHANGINGLEASESTRATEGIES5

Within European

convenience and

neighbourhood

centres, highly

regarded local

provenance retailers

are beneficial to

customer flow

and to increasing

customer

engagement.

Place-making is

at the heart of

re-engineered

shopping centre

strategies and

owners are

integrating services

into the tenant

mix to deliver on

experience and

convenience.

28

Again,theseservicesassistindrivingfootfallandsimplifyingcustomers’dailylives.Throughco-locationofservices,convenienceretailcanhelptocreatetimeefficienciesforconsumers,therebyreleasingaprizedcommodityforcustomers.

MorechallengedlargerneighbourhoodcentresinEuropearealsoexperimentingwithinnovativeretailandmanagementconcepts.Forexample,newretailconceptssuchasInternetstoresofferalimitedproductinventoryintermsofsize,coloursandrange,butallowconsumerstoexperiencetheproductandgainadvice before purchasing online from facilities within the store, for store delivery. Other innovationsincludetheprovisionofagroceryanchorordepartmentstorebywayofanInternetwall,withassociatedspaceformarketingandfulfilment.

5.2 Lease Length, security of Income and security of Tenure

LeasestructuresarequitedifferentintheU.S.andEuropeandarethereforediscussedseparately.

5.2.1 u.s. Lease structure

Leasestructureshaveevolvedrelatively little intheU.S.overthepastdecadeormore.Stronganchororjunioranchorretailersgenerallynegotiate10-yearleaseswithoptionstorenewthatcanextendto30yearsormore.Aretailerinastrongbargainingpositionwillbeabletoobtainoptionstorenewatafixedrate,baseduponperiodic inflationarybumps.Anowner ina relativelystrongnegotiatingpositioncanresistsuchfixedoptions.

Themajorityoftenantsseek5-to-10-yearleasesinmajordestinationcentres,withinflationaryadjustmentsovertheleaseperiod,sometimeswithoptionstorenew.Apercentageoroveragerentisaddedtothebaseratesothattheownercancapturebetter-than-expectedperformancefromtheretailer.Thetermislargelydictatedbythecostoftenantbuild-out,whichisusuallysharedbytheretailerandowner,andisneededforamortisation.

Sincebuild-outshavebeenincreasinglycostlyasretailersestablishtheirbrandidentityandprovideanexperience, there has been little pressure from retailers to shorten the lease. However, if they have anegotiatingadvantageovertheowner,particularlyinanunprovenlocation,theretailermaysuccessfullygeta‘kick-out’clause,allowingthemtovacateiftheirsalesvolumedoesnotreachaspecifiedlevelbyatargetdateorifappropriateco-tenanciesarenotmaintained.

When an owner is taking a chance on a new retailer or one with poor credit, shorter-term leases arecommon.Asaresult,tenantbuild-out isasminimalaspossible. Inneighbourhoodorcommunityretailcentreswheresmalllocalretailersarecommon,leasetermsaretypicallythreetofiveyears,withlongertermsfornationalandanchortenants.


29

5.2.2 European Lease structure

InEuropeanmarkets,leaselengthshavebeentrendingevershorter,atleastinrespectofsecurityofincome.Inmarketswherethe lease length isnotprescribed in law, thetermwillbetheproductofanegotiatedmarketcontractthatisdrivenbytheunderlyingstrengthofdemandandsupply.Thistrendwilldifferacrossmarkets,betweencentresandtemporally.InmostEuropeanmarkets,retailershavearighttorenewtheirleaseonthesameterms,althoughincertainmarketsitispossibletocontractoutofsuchrights.

Currently,retailersaregenerallyseekinga10-yearleasewiththebenefitofaone-waybreakoptionatyearfive,unlesstheprevailinglandlordandtenantlawinacountryismorefavourableasforexampleinFrance,wheretenantsmaybreakeverythreeyears.F&Boperatorsbreakthistrendandareseekingtolengthenleasestoaminimumof 10years,upto 15.Thisreflects thehighratiooffit-outcosts to turnover,whichrequiresamortisationoveralongerperiodoftime.Majorretailersusuallyamortisetheirfit-outcostsovera7-to-10-yearperiod.Giventhis,someownersconsidertherequirementforanearlierleasebreak,whichhasadisproportionateimpactonacentre’ssecurityofincomeprofile,tobesomewhatgratuitous.

However,retailersexplainedthatthepaceofretailchangerequiredgreaterbusinessagilityandthis isaccentuatedwheretheyareunabletoprojectthecostofstoreswithanycertaintybeyondtheinitialterm.Forexample,rentsmaybesubjecttoreviewtoopen-marketrent,ratherthanasteppedindex-linkedrise.

The greatest impact of the digital era for retailers has been on pricing transparency, giving shopperseasy access to competitive pricing information. This has squeezed margins for many retailers. Rentalaffordabilityismoresensitivetorisingcostsand/ordecliningsales.Anumberofretailerssaidthattheywerepreparedtocompensatefortheadditional incomeriskgeneratedbybreakclauses.Alternatively,havinggreatercertainty,bywayofcappedservicechargesand/orsteppedrentalincreases,wouldreducetheneedforabreakoption.Similarly,anumberofretailersalsosuggestedthathavingahighercomponentofvariablerentandlowerbaserentwouldsharetheriskofanyweaker-than-expectedperformanceinregardtoanewlyopeningcentre.

Owners provided a different perspective, arguing that the capital costs and funding requirements ofdevelopment and refurbishment are upfront commitments. They suggest that five-year leases are tooshort,giventhatfinancingrisksareunderwrittenbytheincomesecurityprovidedbyretailleases.Arealestatefundersuggestedthatprevailingloan-to-valueandrequireddebt-servicecoverageratiosallowforamarginallyhigherproportionofvariableincomewithoutimpactingfinancing.

Anumberofownersofexperientialschemescommentedthattheywouldwelcomeshorterleasesforaproportionofthetenantmix if theabilitytoterminatethe leaseweretwo-way.Theyarguedthattheyrequiregreateragilitytoeffectivelymanagethetenantmixinafast-pacedretailworld,characterisedbyfickleconsumersandever-shorterbrandlifecycles.

Indeed,anumberofownersareviewingthe incomeprofileof thecentreasaportfolioandarekeentooptimiseriskagainstretainingoperationalflexibility.TheybalancethelongersecurityofF&Bretailersandthemid-termsecurityofmajorsub-anchorsagainsttheshorterleaseprofileofmoreemergentorshorterlifecycleretailers,butthisoperationalflexibilityrequiresretailerstoforegosecurityoftenure.

Discussionswithretailersindicatethattheyaregenerallyreluctanttorelinquishsecurityoftenureinitsentirety.However,mostretailerswouldconsider linkingleaserenewaltoaperformancebenchmark,asisthecaseforfactoryoutletcentresinEurope,particularlyifthevariableincomecomponentofrentalmodelsweregreater.Anumberofretailerscommentedthatincertaincircumstances,thecentreandtheretailersitaccommodateswouldbenefitfromtheabilitytoterminateapoorlyperformingretailerinanotherwisestrongproperty.


However, most

retailers would

consider linking

lease renewal to

a performance

benchmark, as is

the case for factory

outlet centres in

Europe, particularly

if the variable

income component

of rental models

were greater.

30

5.3 New services and Revenue streams

Most owners in the U.S. and Europe are developing new services for both retailers, who remain theirprimarycustomers,aswellasforconsumers,inordertoadapttothechangingrequirementsofanomni-channelera.Theseservicesmaybebrokendownintothreeareas:thosewhichfacilitatefulfilment;thosewhichgreatlyenhancethecustomerexperience;andthosethatleveragedigitalinfrastructuretogreatlyenhancecustomerinsight.Eachhasthecapacitytogenerateadditionalincomestreamsforowners.

Fulfilmentofdigitalretailpresentsopportunitiesforarangeofnewservices.Ownersareconsideringorareprovidingclick-and-collectlockersand/orcentralisedfulfilmentlocationsintheshoppingcentre.Theseservicescanprovideanadditionalrevenuestream.Someownershavealsorecognisedthatsomeretailersrequiregreaterstorage/logisticsspaceandarecreatingsuchspaceinotherwiseunderutilisedareasoftheasset.Aswellascreatinganewrevenuestream,thecreationofsuchfacilitiesreducestheriskofretailersexpandingstockroomsattheexpenseofsalesspacewithinthestore,therebyprotectingtheasset’svalue.

Someownersareenhancingtheexperienceforthecustomerbydevelopingadigitalmarketplaceforretailersas a transactional website, through sales promotions and push-and-pull marketing delivered through adedicatedapp.Thesaleofgoodsthroughwebsitesprovidesaclick-throughsalesrevenueandsomeownersareseekingthesameforsalesachievedthroughmarketingpromotionsonotherdevices.Thisisoccurringatapointwhensomeconsumersareoverwhelmedbytheexpandingnumberofappsontheirsmartphones.Asingleapppromotedbytheshoppingcentrehelpscustomerstocurateandmanagemultipleretailinterfacesmoreeasily.Mostownersstressedtheimportanceofdesigningshoppingcentreappsthatgiveconsumerstheautonomytoselectwhichretailerstheywishtoengagewithandwhattypeofcommunicationandofferstheyareinterestedinreceiving.

Ownersareleveragingtheirinvestmentsindigitalinfrastructuretodevelopmoresophisticatedconsumeranalytics.Mostownersareattheearlystagesofharnessingtheirdataandareprimarilyusingittodevelopnewperformancebenchmarksforindividualcentresandacrossportfoliostoinformtheirowndecision-makingandassetstrategy.Whererelevant,performancebenchmarksaresharedwithretailersinaneffortto assist their understanding of the customer opportunity, their relative performance, and to improvefuturesalesperformance.

Currently,ownersdeliverbaselineanalyticsaspartoftheirowncustomerservice,butthereisalsothepotentialtodeveloprevenuesfromadditionalresearchandmarketingservicesstemmingfromcustomerinsightcapabilitiesforexistingtenants,potentialtenantsand,complementarybusinessesandservices.Todate,mostownerslimitcommercialisationoftheircustomerinsightanddigitalinfrastructuretodigitaladvertisingmedia,whichcanresponddynamicallyinrealtimetothecustomeropportunity.


Owners are

leveraging their

investments

in digital

infrastructure

to develop more

sophisticated

consumer

analytics.

31

Asmentionedearlier,bothownersandretailersthroughouttheU.S.andEuropearebeingchallengedtobetterunderstandthevalueofstorespacegiventhatthetraditionalmetric,in-storesales,isnolongeran accurate proxy of a location’s productivity. Given that consumers use multiple touchpoints in theirshoppingjourneyandthatsalesoccuracrosschannels,thisissueisofincreasingimportance.

6.1 Negotiating Process

Estimatesofastore’srentalvaluewithinshoppingcentresarestillpredominatelybasedontraditionalapproaches.Retailersdetermineanaffordablerentbasedupontheresidualoftheirsalesprojectionsforthestore,lessoperatingcostsandatargetprofitmargin.Thisleavesaresidualthattheybelievetheycanaffordtopayforrent.Storesalesestimatesarebasedonanassessmentofthevalueofthecustomeropportunityusingproprietarycustomerinsightsandstorecatchmentanalyses.

Theownerand/oritsleasingmanagerswillidentifyseveralretailersthattheybelievewouldbestbenefitfrom a particular location. For existing centres, leasing managers will understand the performance ofcomparable retailers within the centre and in other centres for which they have lease information. Inaddition, they will derive the rent-to-sales ratios of the target retailers in similar centres and alsounderstand theoccupancycosts (rentpluspass-throughexpensesandamortised tenant improvementcosts)thiscategoryofretailercanbear.

Leasenegotiationsarelikelytobebasedontheseassessments,withtheowneralsoconsideringthevalueoftheretailertogrowingthewidercentre’smarketshareofspendinginthecatchment.Equally,retailerswillconsidercompetitivecentresaswellasanypotentialsalescannibalisationof theirexistingstores.Negotiationsproceedfromthesefactors.Theevolutionofomni-channelretailingisplacingconsiderablestressonthismodel.

Intheemergingomni-channelworld,retailerswillneedtodeterminetherentthataspacejustifies,basedonunderstandingthestore’soverallcontributiontothebottomline.Thisshouldincludebothin-storesalesandthecontributionofthestoretoonlinesales.Thisisimportantindeterminingsupportablerentatahighlycompetitivelocation.

Owners and leasing managers are suffering from an absence of important information regarding thecontributionofthestoretonon-storesales,whichwouldhelpthemassessthetruevalueofaretailspace.Lookingforward,rentmodelsandperformancemetricswillevolvetocapturetherentalvalueofstoresmoreeffectively.Thisevolutionmaybesupportedbynewmetricsofcustomers’shoppingbehaviour,astheaccuracyandcapabilityofdigitalsolutionsincrease.

6.2 Current Rent Models

Whileconventionsvarybetweenandacrosscountries,rentalmodelsforcapturingthevalueofastorehaveremainedbroadlyunchangedsincetheadventofthedigitalera.Internationally,abaserentistheprimarycomponentofrentalincome.InboththeU.S.andcontinentalEurope,anadditionalvariablerent,baseduponaretailerachievingacertainsalesthreshold,isadded.Thisisgenerallyknownasturnover, overageorpercentagerents.

6.0 RENTAL CAPTuRE

Looking forward,

rent models and

performance

metrics will evolve

to capture the rental

value of stores more

effectively.

32

Theseperformance-relatedincomestreamsmaybecappedandthresholdsareoftenrevisedinlinewithanyadjustmentstobaserents,whichareoftenindexedtoaninflation-basedmetric.Typicallyformajorshoppingcentrecompanies,thesetop-offrentsrangefrom0to10%percentofbaserentsacrossportfolios,althoughthere can be significant differences between centres and across lease agreements. While this may seeminsignificant,theincomeflowsdirectlytothebottomlineandremainsanimportantcomponentofnetincome.

The incomestreamderivedfromturnoverrentmodels isonlyonebeneficialaspectofreportedsales.Theabilitytomeasuretheperformanceofthecentreandtobenchmarkindividualretailersisatleastasvaluable.Leasingandrenewalstrategiescanbedeterminedbysalesproductivity.Withsalesinformationonnationalandinternationalretailersfromothercentres,ownersareinastrongpositiontodeterminetherentaparticularretailercanpay,providingastrongnegotiatingposition.

IntheU.K.,marketpracticecontinuestobelargelycharacterisedbyfixedrentswithoutanaccompanyingvariablecomponentrelatedtoperformance.21ThesemodelsalsodominateleasingpracticesforhighstreetunitsandretailparksacrossEurope.IntheU.K.fixedrentsarenormallysubjecttoperiodicreviewtoopenmarketrent,usuallyeveryfiveyears.However,sincethelate1990s,theuseofturnoverrentmodelshasbecomeanincreasinglycommonalternativetothepracticeoffixedrentsforU.K.shoppingcentres.

6.3 Omni-Channel Challenges for Rent Models

ThespeedoftransformationforbothretailerandshoppingcentreownerbusinessmodelshasoutpacedtheresponseofrentalmodelsbothintheU.S.andinEurope.Discussionswithretailersandownerssuggestthatconventionalleasemodelsremainlargelyunalteredtodateforfourreasons:

1.in an era of fast-paced digital innovation, the transformation of consumer shopping patterns remains dynamic, making it difficult to establish viable new rent metrics.Bothownersandretailershavebeenmorefocusedonevolvingtheirbusinessmodelsthanonhowrentalmodelsshouldreflectthesechanges.Wheretherehasbeensomemodificationinleasestructures,thishasbeenlargelydrivenbytheusualmarket forces of demand and supply, rather than in response to the shift towards digitised businessmodelsandperformancemetrics.Forexample,inEuropeanumberofsub-anchors/M.S.U.(MediumSizeUnit)retailershavesoughttocapitaliseonthestrengthoftheirbrandwherepossible.Beyondthetoptierofdestinationcentreswheredemandforspaceexceedssupply,certainsuchretailershavesoughtturnover-onlyleasesonveryfavourableterms.

Althoughdrivenbyeconomicfundamentals,theseleasearrangementshavehighlightedthelimitationsofrentalcapturewithincurrentturnoverrentmodels,withorwithoutanaccompanyingbaserent.Thisisbecausethesameretailersarealsopursuingomni-channelstrategiesthatseektomaximisetotalsales.Aspartofthatstrategy,retailersarenotonlyencouragingconsumerstousethephysicalstoreasadeliverychannel for sales transacted beyond the store, but are also equipping sales staff and consumers withdevicesthatfacilitateonlineordersfromwithinthestore.Totheretailer,whatmattersistheoccurrenceofthesale,notwhereiteventuallytransacts.Informationsystemsareevolvingaccordingly.Lookingforward,QRcodescombinedwithpaymentsbysmartphonewillreducetheroleofin-storepaymentterminals,withthetransactionoccurringdirectlybetweenthecustomerandtheretailer’saccounts.Thiswillrender itevenmoredifficultforownerstodiscernevenin-storepurchases.

Fortheshoppingcentreowner, thedefinitionofturnover isbroughtsharply intofocus,alongwiththecontributionofthestoretotheconsumerjourney,whetherthetransactionoccursthereornot.

While traditional leasing models remain unchanged, this is also an early period for innovation andexperimentation. Many owners and retailers are using their digital infrastructure to develop newperformancemeasuresandmetrics,althoughtheyarenotyetlinkedtorentmodels.TheseeffortswillbediscussedingreaterdetailinSection7ofthisreport.

RENTALCAPTURE6

The income stream

derived from

turnover rent

models is only one

beneficial aspect of

reported sales.

33

2.retailers in the U.s. and Europe are still experimenting with multiple elements of their omni-channel business model.Bysomeestimates,only35%ofretailershaveaplantoimplementtheiromni-channelmodel,suggestingthattheindustrystillhasalotofworktodotosuccessfullyintegratethefivekeydimensions(asseeninFigure13)totheseoperations:

•distribution;

•customerinsight;

•inventorytrackingandmanagement;

•single-brandexperienceacrossmultipleplatforms;and

•accounting.

Retailbusinessstrategistssuggestthatnotoneretailerhassuccessfullyaccomplishedallfivedimensionsandthateventhemostadvancedarestillworkingonatleastonecoreaspectofomni-channel.

fIGuRE 13. 5 Key dimensions to omni-Channel strategy

3.retailers are not yet able to isolate the contribution of the store to sales across multiple touchpoints.Arecentglobalsurveyofcross-channelretailersindicatesthat57%ofretailerscurrentlyrunseparateprofit centres for in-store and online, although this is rapidly changing.22 Some 23% have alreadymergedoraremergingonlineandin-storebusinessandaccountinglines.Geo-codingorgeo-fencingispreferredby18%,withallsalesattributedtopre-definedgeographiclocations,usuallyanchoredtophysicalstoreportfolios.Wherethesphereof influence ‘haloeffect’ofstoresoverlaps, thesalewillbeapportionedbetweenlocationsusinggravitymodels.Afurther5%allocateaccordingtocustomerloyalty. To this end, the methodology is very similar to that conventionally used to define shoppingcentrecatchmentandspendingprofiles.Whiletotalsaleswithinageo-fencedareamaybeanchoredtoastore,theywillincludepureonline,clickandcollect,non-storemobile,in-storemobileinadditiontosalescapturedin-storeatthePOS.Retailersrecognisetheyneedtobetterunderstandthestore’scontributiontothebottomline,butthisisclearlyaworkinprogress.

4.some owners feel that it is premature to consider developing new lease structures to take account of omni-channel business models.WithretailersstillimmersedintheintegrationoftheirplatformsandwithpoorPOSdata, it isdifficulttodevelopnewmodels.Nevertheless,someinterimstepsarebeingtaken.IntheU.S.,therehasbeenanincreasingemphasisonhigherbaserents,giventhedifficultyin

RENTALCAPTURE6

Distribution

StockManagement

CustomerInsight

Single BrandExperience

Accounting

34

measuringsales.Someleasingmanagershaveattemptedto includeleaseclausesthatcountvariousonlinesalesthatcanbeattributedtothestoreintheirreportedsales.Thishasbeenmetwithlimitedsuccess thus far, particularly since most retailers’ POS systems do not measure these related sales.Nevertheless,thereappearstobeabroadunderstandingamongownersandretailersthatthestoreiscentraltotheconsumerjourney,whetherornotthetransactionoccursin-store.

6.4 Capturing store value in an Omni-Channel World

The fundamentals underlying the rental value of a store have not changed. Rental values reflect theoperationalvalueof thestore, thevalueof thecustomeropportunityandenhancementof thestore’sbrandwiththoseconsumers.Historically,thisvaluehasbeencapturedbythesalesgeneratedthroughthatphysicalspace,withrent-to-salesratiosusuallyemployedtoexpressthestore’scontributiontotheretailer’sbottomline.

Thegrowthoftheretailer’sdigitalplatformisfundamentallychangingthestore’svalue.Itisempoweringconsumers,resultinginamuchmorecomplexcustomerjourney.Thestoreisnowoneofanumberofsalesplatformsthroughwhichtheretailercanengage,enticeandtransactwithconsumers.

Whatmakesdistinguishingthevalueofthestoreplatformsodifficultisthatconsumersareinteractingwithmultipletouchpointsacrosstheseplatformsforanyonetransaction.Achievingthesaleinthemostappropriatewayiswhatmattersandrequiresadynamicapproach(SeeFigure14).

fIGuRE 14. stores are the Cornerstone of omni-Channel retail

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The role of the store varies depending on the consumer, by mood and according to the purpose of theshopping journey. This is recognised in retailers’ store portfolios, with individual stores tailored to bestmeet their dominant functions within a particular location. For example, stores in the largest and mostdominantdestinationandexperiencecentresareusedtoshowcasethebrand’svaluesandproducts,andtomeaningfullyengagecustomers inthebrandexperiencethroughretailtheatreandrelevantcustomerservices.Thisshowcasinggeneratesbrandvalueforfutureorrepeatbusiness,inadditiontoimmediatesales.

Storeswithinneighbourhood,communityoredge-of-townretailcentres/parksareoftenconcernedwithconvenienceandattentive,yetefficientcustomerservice.Nevertheless,evenwiththesemoreconvenience-orientatedcentres,ownersareestablishingasenseofplaceandcustomerexperience.

6.4.1 Click and Collect

Integratingtouchpointsseamlesslyacrossthecustomerjourneyispivotaltoomni-channelsuccess.Clickandcollecthasbecomeanimportantroleforastore.Discussionswithownersandretailerssuggestthatclick-and-collect salesareamongst themostcomplexandcontentious in termsofvalueattribution tothestore.Usuallydefinedasasalethatistransactedonlineandguaranteedtobeinstoreforcustomercollection,click-and-collectsalesarenotusuallyallocatedtostoreturnoverwithinthetermsofexistingleaseagreements,althoughitemsthatarereservedonlineandtransactedin-storenormallyareaccountedforwithinthestorePOS.

Someownersrecognisethatretailerswithastrongomni-channelbusinessthatuseclickandcollectasasignificantfulfilmentoptioncanbeadriveroffootfallandincrementalsalestothecentre.Discussionwithretailersindicatedthatahighproportionofconsumerspickingupapre-ordereditemfromastorepurchasedanadditionalitemin-store,withthepercentagerangingfrom20%to50%ofsuchcustomersdependingontheretailbusiness.Anumberofretailersfurthercommentedthatindividualswhodomakeanadditionalpurchasein-storetypicallyspendover50%morethanthecostoftheoriginalitem.

Conversionratesarehighfortworeasons.First,theconsumerenteringthestoreisalreadyacustomer.Second,theretailerusesmerchandisingwithinthestoretointerceptandengagethecustomerinadditionalproducts.Retailerswithastrongclick-and-collectchannelbelievethatthefootfallandincrementalsalesgeneratedfortheshoppingcentrerepresentanetbenefitcapturedatthestore’sPOS.

Anumberofowners,especiallyofdestinationcentres,contendthatthecontributionofthestoretotheretailer’sabilitytofulfilonlinecustomerordersshouldberecognisedandthatthesaleshouldbeattributedtothestorewhenthestoreiscontributingtothatsale.Retailersgenerallyresistthisapproachandsuggestthattheywouldsimplyshiftthepointofdelivery.Someretailersalsoarguethatsincetheyhavenotyetintegratedtheirinventorysystems,theyarenotyetseeingcostadvantagestoclickandcollect.However,thereislikelytobeamiddlegroundforacoupleofreasons.

First,there is currently little cost advantage to retailers from click-and-collect fulfilment relative to home delivery. This isdue to the fact thatvery few retailershavean integratedonlineandoutletstockmanagementsystemandevenfewerareabletofulfilonlineordersthroughstockpickingwithinthelocalstore.Thus,therearenocostsavingsforfulfilmentfromclick-and-collectoptionstodate.However,thisisanareaoffocusforretailersastheyconcentrateonturninggrowthindigitalsalesintoprofitandin deriving additional sales from consumers collecting from the store. Thus, store fulfilment will soongenerateatangiblecostsaving.

Second,the alternative collection point to the store itself is unlikely to be cost free.Forexample,inanefforttoensuredeliveryintherightplace,alarge-formatEuropeanretailersoughttocreateacollectionpointatmajortransporthubsinFrance.Theleaseagreementfordeliverywasbasedonapercentageofturnover.Theturnoverratewasmuchlowerthanthatusuallyagreedforstoresalesinshoppingcentres.

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Thisexamplesuggeststhatownersandretailerscanfindcommongroundastotheaccountingand/orvalueofclick-and-collect sales. Improved inventorymanagementsystemswill accelerate this,enablingretailerstoderivesavingsfromusingthestoreforfulfilment.However,itisunlikelythatclick-and-collectsaleswillbecountedatthesamerateasin-storesales.

6.4.2 Returns

Anotherfundamentalroleofastoreintheomni-channelworldisinacceptingreturnsfromonlinesales.Bothownersandretailersappeartobeinagreementthatsalestransactedonlinebutreturnedtostoreshouldnotbereportedasasubtractioninstoreturnoverdata.Researchsuggeststhatreturnstypicallygenerateadditionalsalesinstorethatoftenexceedthevalueofthereturn,therebycontributingtothestore’sperformance.23

6.4.3 Online Transactions In-store

Perhapsthemostcontentiousissueisreportingofonlinetransactionsoccurringinthestore.Inaneffortto better engage and improve customer service levels, many retailers are equipping sales staff withtabletswithinthestore.ThisfreessalesassistantsfromafixedPOSandenablesthemtoassistshoppersknowledgeablyandefficientlyatthepointofneed.

As well as enabling customers to complete sales transactions anywhere in the store, the approach alsoincreasessalesratesbyallowingcustomerstoorderandpurchaseitemsthatarenotinthestore’sinventoryintermsofsizeorcolour,orarefromanextendedmerchandiserangethatisnotusuallyavailablein-store.Similarly,retailersthatmighthaveaverywideproductrangeintheir largeformatandonlinestoresareincreasinglyusingfixedkiosksin-storetoenablethecustomertosearchawiderinventorythanmightbeavailableintheirneareststore.

Therewassomedivergenceinviewsregardingwhatshouldbeattributedtothestore.Manyownersandsomeretailerscontendedthatifasaleoccurswithinthestore,evenifonamobiledevice,itisclearthatthesaleshouldbeattributedasastoresale.Anumberofretailersexplainedthatthereareconsiderabledevelopment and operational costs, both digitally and logistically, underpinning sales of an extendedproductrangethroughanin-storekioskortablet.Someoftheseretailerssuggestedthatsomeproportionofthesalemightbedirectlyattributabletothestore.Stillothersindicatedthatsuchsalesshouldnotbeattributedtothestoreasthemerchandiseisnotordinarilyavailablein-storeandthecontributionofthestoreisalreadyembeddedinthebaserent.

6.4.4 The ‘Halo’ Effect

Due to the above, a number of owners proposed attributing a proportion of all sales that occur in thecatchmentarea,whetheronlineonly,clickandcollect,mobile,orstoresales,tothephysicalstore.Thiswouldreflectthe‘halo’effect‘,24orhowaparticularlocationcanheightenbrandawarenessevenforconsumersshoppingsolelyonline.

Manyonlinepurchasesmaskamorecomplexcustomerjourneythatmightincludeapre-purchasestorevisitthatenabledtheretailertoengagetheconsumerandshowcasethemerchandise,precipitatingasubsequentsaleonline.Retailersgenerallyconsideredthecontributionofthestoretonon-storesalestobealowproportionofthewidermarketingstrategy.Itsvalueisconsideredtobeembeddedalreadyinthebaserent.

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Aspreviouslydiscussed,researchhas indicatedastrongrelationshipbetweenaretailstoreandonlinesalesgeneratedwithinthattradearea. Inmostsituations, ifastore ispresent,onlinesalesarehigher,giventhebranding,‘halo’effectandconvenienceforreturnsofaconvenientphysicalstore.

Ownersandretailershavebeenattemptingtobetterunderstandastore’svaluethroughitsoverallsalesin that tradearea.This reflectsarecognitionthat thecontributionof thestore toretailerprofitabilityisconsiderablymorecomplexinthedigitaleraandwillvarywiththeroleofaspecificoutletwithintheretailer’sportfolioandthemodeoftheconsumer’sshoppingactivity,forexample,whethertheindividualisshoppingforneedorwant,forconvenienceorexperience,etc.

Given this greater complexity, structured discussions with retailers and owners considered whetherconventionalmethodsofrentalassessmentandperformancemeasurementarestilleffectiveatcapturingthe value of the store. The research interviews further evaluated alternative approaches to capturingvalueandexploredarangeofnewmetricsthatmightemerge inthefutureasameasureofshoppingcentreperformanceandinturn,rentalvalue.Thisresultedinawidespectrumofapproachestocapturingvaluethatareofvaryingrelevancetodifferenttypesofshoppingcentres.Thisevaluationofarangeofpossibleapproachesprovidesausefultoolboxforselectinganddevisingcurrentandfuturerentalmodels.

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Theapproachestocapturingstorevalueputforwardbyownersandretailerswithintheresearchinterviewsare wide-ranging and may be broadly grouped into three principal categories. These include fixed rents,turnoverrentmodelsandpotentialnewrentmodelsbaseduponalternativeperformancemetrics(Figure15).

fIGuRE 15. The Toolbox

7.1 fixed Rent Models

FixedrentsdominateleasingmodelsinshoppingcentresintheU.K.andonhigh-streetretailelsewhereinEuropeandupscalestreetfrontretailintheU.S.(Figure16).Someownersarguethattheadvantageofthismodelisthatanegotiatedrentbasedoncompetitivemarketforcesisthebestindicatorofastore’svaluetotheretailerwhocanbestbenefitfromthatspace.Fromtheretailer’sperspective,thefixedrentaccountsfortheoverallcontributionofthestoretototalsales,nomattertheretailchannel.

Thismodelbypassestheneedtoaccountforin-storevsonlinesalesthatcanbeattributedtothestoreforthepurposeofdeterminingrent.Retailersareattractedtothecertaintyoftherentalcostthatfixedrentmodelsprovide.However,theyarguethattheperiodicreviewofrentallevelsintheU.K.,usuallyatfive-yearintervals,erodesthisbenefitandthatthelackoftransparencybeyondyearfiverepresentsamajorrisk.

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fIGuRE 16. Fixed rent Models

The U.K. rent review process is based upon comparable rent evidence, which in a shopping centreenvironment is largely under the control of the owner. Being quasi-judicial in nature, this results in aparticularlyadversarialprocess.

Many retailers interviewed commented that the level of uncertainty as to whether rental levels wouldremainaffordablepost-reviewisdrivingsomeretailerstowardsshorteningleaselengthsorensuringthereisabreakclauseatreview.Retailersfavourfixedrentallevelsbeingincreasedinlinewithanagreedindex-linkedbenchmark,commonlyrelatedtoinflation,asistypicalinU.S.andcontinentalEuropeanmarkets.IthasemergedasanalternativetorentreviewsintheU.K.andrepresentsagrowingsegmentofthemarketsince2000.

Althoughrecognisingthatanopenmarket-negotiatedrentclearlyindicatesthemarketworthofastoreatthetimeofthelease,manyownerscontinuetoprefertheinclusionofaperformance-relatedincomestream. In addition to a base rent, this performance-related income rewards owners for continuing toinnovate,collaborateanddevelopbestpractices.

Moreover,anumberofparticipantssuggestedthatfixedrentalmodelsleadtoalowalignmentofinterestbetween owners and retailers at a time when effectively responding to consumer change requiresincreasingcollaborationbetweentheparties.Bothownersandretailerscontendthatperformancemetricshelpensure thatwhatgetsmeasured tends togetdone.However, there is lessagreementas towhatshouldbemeasured.

7.2 Turnover or Percentage Rent Models

Manyownersandmost retailers favour turnoverorpercentage rentmodels.However,opinionsvariedwidelyamongstandbetweenthegroupsastohowthismightbestbeachieved.

There are positives and negatives in adapting this sales volume-based metric to the omni-channelretailmarket.Manyretailersconsiderthataperformance-related incomestreamshould leadtobettermanagementbyowners.Anincomecomponentthatisbaseduponretailers’salesperformanceincentivisesownerstocontinuetofocusstrategyonsalesgenerationandincreasedmarketshare,andmotivatesthemtocloselymonitortheimpactoftheirstrategiesthroughreportingofsales.However,inanomni-channelworld,storesalescannotcapturethecontributionofthestoretototalsales.

Thesalesturnover-basedmodelsmaybecategorisedintothreebroadgroups:conventionalturnovermodels,Europeanfactoryoutletcentre-stylemodelsandgeo-fencingmodelsthatdrawfromairportretailmodels(seeFigure17).

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fIGuRE 17. Turnover rent Base Models

7.2.1 Conventional Turnover Rent Models

Conventionalturnoverrentmodelsincludeabaserentaccompaniedbyavariableincomecalculatedasapercentageofsalesachievedaboveacertainthreshold.CommonlyutilisedintheU.S.andcontinentalEurope,baserentcomprisesfrom90%to98%25oftotalrentacrossportfoliosintheU.S.andfrom95%to100%inEurope.AnalysisofdatarelatingtoleasingpracticesintheU.S.showsalong-term shift toward higher base rents in high-quality centres, thereby diminishing the impact of percentage rents.Someownershaveindicatedthatthishigherbaserentsomewhatcompensatesforsalesthattheybelieveareassociatedwiththestorebutarenotreportedassuch.

Nevertheless,theseturnoverrentsareanimportantpartofincome,astheyflowstraighttothebottomline.Inaddition,reportedsalesallowanownertobettertracktheretailerandcentre’sperformance.Itbecomesakeytoolinleasenegotiations.

Indeed, recentanalysisof thesalesand rentalperformanceof centres revealsanegative relationshipbetweensalesproductivityandnetaskingrents,suggestingthatthevariableperformancecomponentofrentcapturesgrowth.26Althoughtheanalysisisnotbrokendownbytypeofcentreand,therefore,likelymasksthedifferentialperformanceofsegments,itconcludesthatomni-channelstrategiescomplicatethetraditionalleasingprocessandthisislikelytoimpactfutureleasestructures.

Mostretailersarekeentoretainalinktosalesintheperformance-relatedrentalmetric.Manyofthoseinterviewedstatedthatwhiletheroleofthestoreismulti-functional,individualstoresarestillrequiredtodeliveranappropriaterent-to-salesratiotoachieveatargetprofitabilityreturn.

Someownerspreferredaturnoverrentmodel.However,theycommentedthatwhileturnover levels intheirshoppingcentreshaveremainedbroadlystableinrealtermsinrecentyears,theybelievethatgrowthisdriftingonline,withthestoreusedaspartofthedeliverysolutionbywayofclickandcollectandothermeans.Tocapturethisvalue,theseownerssuggestedtheinclusionofclickandcollectandin-storeonlinesalesintheirreportedturnover,ashintedearlier.

Turnoverrentmodelscanbecomeattractiveoptionsinsecond-tiercentres,wheredemandforspacemaybemuchlowerthanfordestinationcentres.Intheseinstances,alower-than-usualbaserentmightpersuadeadesiredtenantwhomaynotbecertainofitsperformancetolocateinthecentre,helpingtosharerisksandmorecloselyaligninterests,whilecompensatingtheownerforstrongsalesperformance.

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Anumberof retailers inboth theU.S.andEuropesaid theirprofitmarginsare typicallyhigher in thesecentresthaninhighlycompetitivefirst-tiercentres.Indeed,retailersseekingprimespacesinluxuryretailhigh-streetorupscalestreetfrontlocationsincludeamarketingvaluewithinthebudgetforastoretojustifyveryhighrents.Mostshoppingcentre-basedretailersareonlystartingtovaluethisrelationshipexplicitly,butitisalreadyimplicitintheacceptanceofhigherrent-to-salesratiosforpremiumcentres.

7.2.2 European factory Outlet-style Leasing Models

Europeanownersofsomeneighbourhoodandalsoofmorechallengedmid-sizedcentressuggestedrentmodelsmorecommonlyassociatedwithEuropeanfactoryoutletcentres.Theseinvolveaturnoverrentmodel,usuallyincludingalowerbaserentthanforconventionalturnoverrentmodels.

Animportantcomponentofsuchmodelsistheabsenceofsecurityoftenure—thatis,theretailer’srighttorenewthelease.SecurityoftenureiscommontovaryingdegreestolandlordandtenantlawinmostEuropean countries. However, given the importance of retailer performance to income, factory outletcentreleaseagreementsincludetheowner’srighttoterminatealeaseifastoreconsistentlyfailstoreachanagreedsalestarget.

Asdiscussedpreviously,someofthemostsuccessfulretailbrandsthatactassub-anchorsinEuropeancentreshavenegotiatedturnover-onlyleasesinneighbourhoodandsecond-tiercentresinrecentyears,while also retaining rights to security of tenure. Nevertheless, interviews with retailers indicate thatmanywouldforegosecurityoftenureiftherighttoterminatetheleasewerelinkedtoanagreedrollingperformancebenchmarkandownersparticipatedingreaterrisksharing.Anumberofretailersfurtherexplained that once base rents are agreed upon, the owner is much less exposed than the retailer tolower-than-anticipatedfootfallandsalesacrossthecentre,giventheverylowperformancecomponentofrents.Inshort,whiletheperformanceelementensuresthatincomecanincreaseifthecentreperformsinlinewithorbetterthanexpectations,itcannotdecreaseifitunderperforms,excepting,ofcourse,tenantdefaultorrentalrevisions.

Mostretailersrecognisedtheneedforasignificantbaserenttolowerrisk,secureastableincomebaseandachievefinancing.However,theysuggestedthatthevariable,performance-relatedcomponentofrentshouldbealargerproportionoftotalrent,witharangefrom75%to85%cited.Theseretailerscontendedthatthiswouldprovideforgreaterrisksharingthatwouldreducetherequirementforsecurityoftenure.Some retailers stressed that, while terminating the lease of a non-performing retailer might be in allparties’interests,therighttoendaleasemustbeperformance-linkedratherthanarbitrary.

Accordingtothislineofthinking,theturnoverrentmodelnegotiated,whichwilllikelyincludecaps,floorsandsteppedhurdlerates,should,ratherliketheimplicitvalueofafixedrent,reflectthetotalvalueofthestorewithinaretailer’somni-channelbusinessmodel.Thiswouldimplythattheproportionofsalestransacted online will grow in tandem with the percentage rate applied to store sales. This implicitlyreflectsthestore’scontributiontothecustomerjourneyunderlyingonlinetransactions.Inotherwords,theturnoverrentsliceofthestoresalespiewouldincreaseiftotalsalesincreasefasterthanstoresales,butthestore’sroleremainspivotaltototalsalesgrowth.

Thoseownersandretailersfavouringfixedrent,conventionalsalesturnoverandEuropeanfactoryoutlet-style leasing models see store value being captured through an open market-negotiated rent. To thisend,thevalueofthestore’scontributiontothewideromni-channelstrategy(andequallythevalueoftheretailertothewiderassetstrategy)willbeembeddedimplicitlyintherent.Thisiscertainlytrueofnegotiations for a new lease, although given that the omni-channel retail model has not yet reachedmaturity,itislessclearwhenrelyingoncomparableevidencetoestimaterentalvaluesuponleaserenewal,orforfixedrentsatrentreview.

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7.2.3 Geo-fence Turnover Models

Most omni-channel retailers in the U.S. and Europe are striving to merge their online and in-storeaccountingsystemsinordertobetterunderstandoverallsales.Manyarecreatinglocation-basedprofitcentres,usingtheirstoreportfoliostoanchoranddefineappropriategeographicareas.Usingpostalorotherlocationalcodes,onlinesalesaregeo-codedandattributedtostore-basedlocations.Thisknowledgeenablesretailerstoquantifythevalueofaconsumeropportunitywithinaspecificlocation.Italsoenablesthemtounderstandinmoredetailthecontributionofdifferentconsumertouchpoints,includingthestore,tothecustomerjourney.

Fromtheowner’sperspective,understandinghowtheretailerisperforminginthecatchmentareathroughtotalsales isalsoveryvaluable.Aparticipant in theresearch interviewsexplainedthat ifastore’ssalesdecline,aretailer’sdecisionwhetherornottostayinacentremaydependontrendsintheirtotalsalesinthecatchmentarea.

Understandingthesizeofthetotalpieiscrucialtoassessingthevalueofthestore.Ofcourse,additionalcostsassociatedwithoperatingadigitisedplatformintermsoflogistics,stockmanagementmarketing,etc.alsoneedtobetakenintoaccount.Thenextstepinvolvesapportioningthecontributionofthestoretothedifferenttypesofcustomerjourney,whichisanareaofgrowingexpertiseformanyretailersandowners.

Anumberofownersfavouredamoreexplicitapproachtocapturingthevalueofastorewithinomni-channelbusinessmodels,predominantlyinconjunctionwithabaserent.Drawingfromexperienceofairportretailmodelsandothertransporthubs,wherepercentageratesappliedtosalesvaryaccordingtothecustomer’sbuyingbehaviourandtypeofproduct,theseownerswouldapplydifferentratesofturnovertodifferentsortsoftransactions,reflectingthevariablecontributionofthestore.

Forexample,asaleinthestoreislikelytohavethehighestpercentageturnoverrateapplied,whileanon-storeonlinetransactionwouldapplythelowestturnoverrate,reflectingonlytheregionalhaloeffectofthestore.Click-and-collecttransactionswouldregisteraratesomewhereinbetweenreflectingthegreatercontributionofthestoretocustomerfulfilment,butalsotheadditionalcostsofachievingthesaletotheretailerandthevalueofclickandcollecttothecentre.ItshouldbenotedthatintheU.K.retailersprovidepaymentsofaround6%ofsalepriceforitemsmarketedonlinethroughclick-throughcouponsplacedonthird-partywebsitesorweb-mails.

Aperformancemodelthatrecognisesthevariablecontributionoftheshoppingcentretothewiderangeofcustomer journeys is favouredbymanyowners,althoughmostthoughtthatretailers’ reluctancetosharedatawouldbeabarrier.Althoughmanyretailersrecognisethevalidityoftheapproach,particularlyifaccompaniedbygreatercollaborationbetweenownersandretailers includingmorerisksharing,thesuccessofsuchamodelwilldependuponitsdetails.

Individual lease agreements will continue to reflect the balance of power between the retailer andowner.Moreembryonicretailers—thosewithweakercovenantsoronline-onlyretailersseekingaphysicalpresence—maybeopentocollaboratemorewithowners.

Wheresuchretailerscanhelpdifferentiateacentre,ownersmaybewillingtotakealimitedrisk.However,asanticipatedbyowners,manyretailersarereluctanttosharesensitivedata.IntheU.S.,similarsharedrevenueapproacheshavebeenusedinpartnershipsbetweenmanufacturersand/orpure-playandbricks-and-mortar retailers. A jewellery supplier and online retailer, for instance, created partnerships withindependentretailstoresthatitsupplied.Theindependentretailerreceivesaportionofeverytransactioninanagreedgeo-fencedareaandsharesdifferentmarginsongoodsboughtthroughthestoretothosepurchasedonaclick-and-collectbasis.27Similarly,therelationshipandprofitsharingbetweenbrandownersandfranchiseesisshifting,notablyindepartmentstores.Previously,brandsreliedonfranchiseestoinitiateanddevelopcustomerrelationships,withfranchiseesoftenhavingfullautonomyonmerchandisingand

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management.Whilethefranchisee’sroleasthepersonalfaceofthebrandremains,thebrandsthemselvesarenowabletoengagedirectlywithconsumersthroughothersaleschannels,especiallythroughon-lineadvertising,socialmedia,emailmessagesandtheirwebsites.Asaresult,thefranchiseestillremainsanintermediarybetweenbrandandcustomer,butinamorediminishedposition.However,thefranchisee’sroleinfulfilmentandshowcasingproducthasincreased.

7.3 use of Alternative Performance Metrics with Leasing Models

A number of owners of both destination and neighbourhood centres in the U.S. and Europe hopedthatalternativemetricsmightrewardthemfortheiroperationalmanagementexpertise.Suchowners’business models have transformed shopping centres into places that attract, entice and engage bydeliveringonexperience,convenienceandexceptionalcustomerservice.Theseownersaredeliveringthecustomeropportunity,notmerelyspace,bydrivinghigh-valuetraffictotheirstores.Ontheotherhand,retailerswouldbewillingtoacceptmetricsthatrewardthemforstrongervolumeandvalueofconsumeropportunityifownersinvestininnovativeassetstrategiesthatgeneratetheseresults.

Retailersconfirmedthattheyarebuyingintothecustomeropportunityprovidedbyprogressiveownerswhoproduceanoperational,customer-facingbusiness,notmerelyanincome-producingrealestateasset.Whilemostretailersagreedthatownersshouldbeincentivisedfordeliveringmore,anynewperformancemetrics remainundefined.Yet, to theextent thatnewmetricsaredeveloped, theyshouldsupplementsalesdata,whichremaincentraltogaugingastore’sperformance.

Bothownersandretailersacknowledgethatoncecustomersare insidethestore,conversionratesareprincipallydrivenbyaretailer’sproducts,priceandcustomerservicelevel.Moreover,aproportionofthesalesgeneratedwilloccuronline.Indeed,anumberofretailersexplainedthatfindingappropriatemetricstorewardownersandmanagersfordeliveringastrongercustomeropportunitymirroredthedifficultyin rewardingsalesstaff.Themorepermutations involved incompletingapurchase, theharder it is tomeasurehowmuchgoodcustomerserviceorsalestechniquecontributestoin-storeturnover.

Whilstownersandretailersacknowledgedthedifficulty infindingthesemetrics,theywerenot lackinginrecommendationsthatmightbeusedforhurdlerateslinkedtorentalincome.Manyoftheserelatetoexistingkeyindicatorsalreadyusedtomonitortheperformanceofthecentreandindividualoccupiers,aswellasnewmetricstoincentiviseretailstaffmoreeffectivelyinanomni-channelera.Amongthenewperformancemetricstoemergefromthediscussionswere:netshoppinghours;volumeofagreed-targetcustomers;andconversionratesandbasketsize(Figure18).

fIGuRE 18. alternative performance Metrics

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7.3.1 Net shopping Hours

Footfallandcustomerflowaremonitoredbyallthemajordestinationshoppingcentreownersinterviewed.However,toolsformeasuringtheserangewidelyinsophisticationandaccuracy.Suchmeasurement,notoftenfoundinneighbourhoodandcommunitycentresintheU.S.,ismorecommoninEurope.

With an increasing emphasisonplace-making, some owners consider net shoppinghours aneffectiveperformancemetricmeasure.Thismeasuresboththevolumeofconsumersandtheirdwelltime,therebyprovidingameasureoftheconsumeropportunityafforded.Indeed,itwascommentedthatwheredataillustratedthataretailer’sindividualmarketingactivitiesand/orpresencegeneratedavaluablenetbenefitforthecentrethatwasnotalreadyreflectedintheleaseagreement,thatsuchretailercouldberewardedwithrentaldiscountsand/orlowerservicecharge,orarentalholidaywithinturnovercatch-upmetrics.

SomeownersofneighbourhoodandlargerconvenienceschemesinEuropefavouredthisapproach.Theseownersarefocusedondevelopingassetstrategiesandmarketinginitiativesthatincreasethenumberofvisitstotheshoppingcentrebycustomersandextendthedwelltimeofsuchconsumers.Theseinitiativesinvolvetheco-locationofpublicservicesandleisureoperators,forexamplehealthcentresandgymnasiums,whicharelow-incomegenerators.Wheresuchstrategiessignificantlyincreasethecustomeropportunity,ownersandmanagersalsowishtoberewardeddirectlyfortheopportunitycostofalternativeincome.

7.3.2 volume of Customers

A number of owners suggest using new technology such as beacons to develop more refined metricsthatquantifythevolumeofagreed-targetcustomers,ratherthansimplyfootfall.Whilethistechnologyisstillinitsinfancy,itisevolvingrapidly.Althoughcapabilitiesbetweenbeacontechnologiesvary,mostarenowabletotrackindividualconsumersbytheIPaddressassociatedwithasmartphone.Suchtrackingis possible regardless of whether a consumer opts-in or the phone is switched on, so long as phonelocationservicesareenabled.Moregranularinformationisachievablewhereusersdownloadorsign-intoshoppingcentreappsorotherdigitalmediaoperatedbythecentre.

Essentially, owners and retailers agree upon the characteristics of a store’s target consumer—theircustomer—andagreeonappropriatehurdlerates.Whileofinterestinprincipletoanumberofownersofdestination,convenienceandmorechallengedschemes,theapplicationofnewtechnology,togetherwiththemanagementandanalysisofthedataamassedfromit,isnotyetadvancedenoughtoenablethis,theyacknowledge.However,itwasconsideredthatametricbaseduponsuchagreed-targetcustomervolumesmightbeincorporatedintoleaseagreements,especiallywithrespecttoperformance,inthefuture.

7.3.3 Conversion Rates and basket size

Anumberofretailersstressedthatthevastmajorityofsalesstilloccurredin-store.Whilethestoreisoneofmanytouchpointsalongtheconsumer journey, it isaparticularly importantone.Mosttransactions,whether in-store or online, involve the store at some stage of the journey. The store provides a face-to-faceinteractionbetweenthebrandandtheconsumerandamulti-sensorymarketingopportunity.Inthis context, those retailers argued that new metrics, while valid and desired, need to retain a link tosalesturnover.Incontrast,someownersandretailersarguedthatownersandmanagersarerequiredtodeliverthecustomer,butconversiontosaleswithinastoreistheresponsibilityoftheretailer.Onceinside

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thestore therearemanyvariables impactingonconversion rates thatonly the retailercan influence:principally,product,priceandservice.Fromthisperspective,someownersandretailersarguedthattheowner’sperformanceshouldbebasedondeliveringapre-agreedvolumeofadefinedcustomerprofiletotheretailer’sunitandnotontheretailer’sabilitytoconvertthisflowintosales.

Inaddition,manyretailerscommentedthattheissuesgeneratedbyomni-channelretailforrentmodelsaregeneratingparallelissuesforsalesstaffwithaperformance-relatedcomponenttotheirpay.Inthesamewaythatavalueofastoreshouldreflectitscontributiontototalsalesinagivenlocation,remunerationpolicies must ensure that staff members are rewarded for their contribution to a sale regardless ofwherethetransactiontakesplace.Dependingonhowintegrateditsplatformsareandhowadvanceditscustomerinsighttoolsare,anindividualretailermightbeabletoachievethisthrougheffectivetrackingofcustomersacrosstheirsaleschannels.Othersusecustomersurvey-baseddataasaproxytounderstandthecontributionofthestoretoonlinetransactions.Itwassuggestedthatsuchapproachescouldalsobeusefulasrentalperformancemetrics.

Retailershavetraditionallyemployedkeymetricssuchasconversionratesandbasketsizetobenchmarkstoreperformance.Asretailersdeveloptheirabilitytotrackconsumersacrossmultipleplatformsandgaininsightintothecrosschannelbuyingbehaviourofindividualcustomerstheyareabletorefinethesekeystoremetricstoincludeonlinesalesthatwereinfluencedin-store.Onesuggestionmadewasthatbothtraditionalandevolvingstoremetricscouldalsobeemployedforaperformance-relatedrentalcomponent.

Conversion rate and basket size benchmarks link footfall, or potentially customer volume, to sales bymeasuringboththenumberofconsumersthattransactandtheaveragebasketsizeoftransactions.Basketsizecouldbeeasilyachievedforthecentreasanentitywherefootfalldataarecollectedandsalesvolumesarereportedtotheowner/manager.Increasingly,conversionmetricswillalsobeachievable,enabledbydigitalandvideotracking.Employingsuchmetricsatthecentrelevelallowsforperformancemetricstoconsiderthevalue,notmerelythevolumeofconsumers.Linkingthisbenchmarktoaperformance-basedtop-uprentwithagreedhurdleratesmightbetteralignownerandretailerinterests.

Thesemeasurescouldalsobeemployed tobenchmark theperformanceof individual retailersagainsttheirrelevantsectororsub-sectorwithinthecentre.Thiswouldrequireretailerstoreportkeymetrics,orowners/managerstocount/digitallytrackconsumerflowpassingandenteringaunit.Whileretailersare often required to report sales data for management purposes, current leases often stipulate thatsuchdatamaynotbeusedtoinfluencerents.Assuch,whileownersareabletoreadilycalculatesuchmetricsandretailerswouldbeinterestedtounderstandtheirrelativeperformanceagainstanappropriatebenchmark, their use as new rental metrics requires retailers to reconsider how such data might beemployed.Moreover,suchbenchmarkswouldbemorepowerfulifretailerswerealsoableandpreparedtoprovidetotalstore-influencedsales.

THETOOLBOX7

46

This research explores how the digital era has accelerated the pace of retail change—a process withlittleprospectofslowinganytimesoon.Overthepast15yearsasonlineretailinghascapturedalargerportion of sales, owner and retailer interests have become more closely aligned, yet the structure ofrentalagreementsremainsbroadlythesame.Inrecentyears,thechangingroleofstakeholdersmeansthatownersandretailersunderstandthattheymustworkevenmorecollaboratively. Inthenearterm,thehistoricallyadversarialrelationshipbetweenlandlordandrent-payingtenantisunlikelytodisappear.Itisclearthattheevolutionofrentalagreementstoaccommodatethenewrealityisatanearlystageofdevelopment.

Onthepositiveside,theseinterviewshaveidentifiedmuchcommongroundbetweenmanyownersandretailersastothepreferredwayforward.Clearly,differencesexistaboutdetails,butitishearteningtoknowthatretailersandownerssharegoalsandwillincreasinglydosointhefuture.

Ifcurrentleasingmodelsare‘working,butcreaking’,theindustrywillstarttorefurbishorreplacethem.Appropriate solutionswill varybetweendifferent typesof centres in termsof functionandscale, andbetweendifferenttypesofretailersintermsofsectorandbrandpowerforthetenantmix.Indeed,anyleasewillremainanegotiatedcontractbetweenindividualparties.

It is likely that initially, innovative lease models will emerge from more challenged centres; after all,necessity is themotherof invention.The toolboxemerging fromthis researchaims toprovideawiderangeandspectrumofalternatives,organisedinalogicalframeworkthatisintendedtoassist,ratherthanprescribe,thedevelopmentoffutureleasemodels.

Inthisfast-pacederaofcontinuinginnovation,businessmodelswillcontinuetoevolveasretailersandowners anticipate and adapt to change. However, given that omni-channel retail involves the blurringof two of the most dynamic and innovative industries—retail and technology—it is equally certain thatsolutionswillemerge.Forthisreason,thisstudymayhavetoberevisitedshortly.

8.0 OuTLOOk

Appropriate

solutions will vary

between different

types of centres in

terms of function

and scale, and

between different

types of retailers in

terms of sector and

brand power for the

tenant mix.

47

Weofferourwarmthanksandappreciationtothosewhocontributedinstructuredinterviewstothisstudy.Mostindividualswishedtoremainanonymousandhavetheircompany’sparticipationacknowledged.Thereportwouldnothavebeenpossiblewithouttheirassistance.

Interviewsdrewuponindividuals’knowledgeandexperienceoftheshoppingcentreindustryanddonotnecessarily represent the view of their employers. For this reason, there were a number of instanceswheremorethanoneindividualwasinterviewedfromthesamecompany.

Ofcourse,thosecontributinginformationarenotresponsiblefortheviewsexpressedinthisreport.

AberdeenAssetManagementAirsageAltareaCogedimAppearHereBarclaysBestsellerBritishRetailConsortiumBucksbaumRetailPropertiesCBRECBREGlobalInvestorsCitibankCityconOyjColliersInternationalCorioN.V. (mergedwithKlépierre31.03.15)Cornish&CareyCoStarGroupCushman&WakefieldDebenhamsPLCDeutscheAssetManagementECEProjektmanagement G.m.b.H.&Co.KGFootLockerInc,EuropeFungGroupFuturesCoachingGap(Europe)IncGeneralGrowthPropertiesGreenStreetAdvisorsHammersonICGroupIntuJCrewJavelinGroup(acquiredby AccentureStrategy,29.06.15)JonesLangLaSalleKlépierre

LandSecuritiesLaSalleInvestmentManagementLincolnPropertyCompanyLululemonAthleticaMacerichMackaysStoresLtdMacy’sMadisonMarquetteMangoMediaSaturnMilliganRetailMLV&CoMothercarePLCMultiCorporationNextPlcNomiPathIntelligencePropertyMarketAnalysisLLPRamcoGershensonPropertyTrustReteamGroupSimonPropertyGroupSonaeSierraTaubmanTelseyGroupTheDisneyStoreTheLegoGroupTravisPerkinsPlcTriGranitCorporationWellsFargoSecuritiesWestfieldCorpWestfieldLLCWilliams-SonomaWoodburyCorporationYum!

LIsT Of CONTRIbuTORs

48

1According to a 2013 survey by Multichannel Merchant and Neustar, 35% of retailers indicated they had alreadyimplementedanomni-channelstrategy,whileanother27%plannedtodoso;however,38%reportednoplansofanykindforthis.‘OptimizeOmnichannelEngagementWithActionableConsumerInsights,’p.4,https://www.neustar.biz.

2Allinterviewswereconductedwiththeunderstandingofstrictconfidentiality,sothatindividualsourcesofcommentswill not be cited here. However, companies that have contributed information and insights to the project areacknowledged.

3BillGates,TheRoadAhead,Penguin,1995.4JLL,‘Retail2010’;RetailFuturesProgramme,1999;JLL,‘TenForcesforRetailChange,’RetailFuturesProgramme,2001.5JLL,‘ConvergingRe-tailandE-tailWindows–OpportunityorThreat,’London,2000.6CentreforRetailResearch, ‘OnlineRetailing:Britain,Europe,USandCanada,’2015,http://www.retailresearch.org/

onlineretailing.php.7Javelin, ‘OrganisationalStructure:TransformingtheStructureofYourOrganisationforTrueOmni-ChannelRetail,’

2014;McKinsey,‘MakingStoresMatterinaMulti-ChannelWorld:PerspectiveonRetailandConsumerGoods,’Summer2014,http://www.mckinsey.com.

8More than four-fifths (87%) of retailers believe that an omni-channel strategy is somewhat to very important orcritical.SeeMultichannel MerchantandNeustar,p.5.

9Deloitte,‘TheChangingFaceofRetail,’2011,http://www.deloitte.com.10PWC/JDA,‘GlobalRetailandConsumerGoodsCEOSurvey:TheOmni-ChannelFulfillmentImperative,’December2014,

http://www.jda.com.11AccordingtoNielsen,13%ofAmericansasof2014subscribedtoAmazonPress,whichallowsforfreeshipping.See

EmilySteel,‘NielsenChartsReachofVideoStreaming,’The New York Times,March12,2015,p.B4,http://www.nytimes.com/2015/03/12/business/nielsen-reports-2-in-5-us-households-subscribe-to-video-streaming-services.html?_r=0.

12Amazon has not booked a consistent profit nor issued dividends since it was founded, and yet has a marketcapitalizationof$225billion,asofJuly17,2015,accordingtoFidelityInvestments.

13McKinsey,‘DigitizingtheConsumerDecisionJourney,’June2014,http://www.mckinsey.com.14Genesta,‘TheCaseforRealEstateInvestinginSweden,’January2014;Genesta,InvestmentStrategyUpdate,January

2015,http://www.genesta.eu.15CBRE,‘HowGlobalistheBusinessofRetail?’Global Research,April2015,http://www.cbre.com.16A February 2014 study by Deloitte revealed that in a sample of women’s apparel stores in the U.K., online sales

providedanetboosttosales,onlycannibalisingin-storesalesbylessthan3%.AndreaPozzioftheEinaudiInstitutefor Economics and Finance in Rome studied a major U.S. grocer and determined that even for this convenience-orientatedretailer,forevery$1insalescapturedonline,only$0.35wascannibalisedfromthestore.

17Athleta,Baublebar,Birchbox,Bonobos,BostonProper,CharlesTyrwhitt,Figleaf.com,Frank&Oak,Indochino,NastyGirl,RenttheRunway,andWarbyParkerareafewexamplesofonline-onlyretailersthathaveopenedphysicalstores.

18Cameraandothercountersystemsarereportedtomisscustomerswhoarewalkingclosetogether,andmaycountshoppingcarts,petsorotherobjects.

19Identificationofcustomersisintheaggregate,givingtheirareaofresidenceandlikelydemographictraits;incontrast,individualidentificationwouldpresentlegalandprivacyissues.

20Forexample,Intuandintu.co.ukandAltareaandrueducommerce.fr.21IntheU.K.,fixedrentisa100%rent,withnoperformanceelement.Itisalsocommontootherformats,likeretail

parks/big-boxandhighstreet.Ontheotherhand,baserentistheelementoffixedrent(non-variable)inaleasewithaperformanceelement,usuallyturnoverpercentage.

22EbeltoftGroup,‘GlobalCrossChannelRetailingReport,2014,’2015,http://www.ebetoftgroup.com.23ICSC,‘ShoppingCenters:America’sFirstandForemostMarketplace,’2014,http://www.icsc.org/.24BankofAmericaMerrillLynch,‘Consumer&RetailConference’(BloombergTranscript),Macy’spresentation,March

11,2014,p.6;Accenture,‘TradingSpaces:ChangingtheWayRetailersThinkaboutStores,’2012;JavelinGroup,‘HowManyStoresWillWeReallyNeed?U.K.Non-foodRetailingin2020’;RetailThinkTank,‘HowistheInternetChangingRetail?’,May2010;KPMG/SynovateRetailThinkTank,‘WhitePaper#16,’KPMG/Ipsos2010.

25IntheU.S.,baseduponareviewofannualreportsforthefivedominantmallshoppingcentreowners;inEurope,basedonfindingsofstructuredinterviews.

26CBREResearch,‘MallSalesPerformanceHintsatParadigmShiftforLeaseStructures,’July8,2015,www.cbre.com27DarrenDahl,‘AnOn-LineVendorCreatesLinkswithBrick-and-MortarStores,’TheNewYorkTimes,January7,2015,

http://www.nytimes.com.

NOTEs

DSM Part 2:

What is omni-channel and why should the EU care?

INSIGHT PAPER

June 2016

The International Council of Shopping Centers (ICSC) is the global not-for-profit trade association for the retail real estate sector representing owners, developers, occupiers, investors, retailers and service providers. It has a diverse membership with over 70,000 members globally in 100 countries and over 7,000 members across 45 countries in Europe. Our industry and membership represents over 200 million m² of floorspace covering a variety of retail formats.

2

Executive summary

1. Omni-channel retail is removing the traditional boundaries between online and offline retail – with

all the policy challenges this implies, in particular the need for a level playing field between the

rules governing brick-and-mortar retail and those governing e-commerce.

2. Far from diminishing the role of the physical store, digital retail has expanded it. Most omni-

channel strategies are anchored on store portfolios, with their value extended from being a point of

sale to the backbone of omni-channel retail operations and marketing strategies.

3. As the true value of a retail space is now based on both in-store sales and the contribution of the

store to online sales, traditional turnover rent models are not fit for purpose anymore and put the

business model of the retail real estate sector at stake.

4. New technology, together with wider structural economic and societal macro trends, has facilitated

and accelerated changes to consumer buying behaviour. The consumer decision-making

journey is more complex, involving cross-channel shopping activity pre-, during and post purchase.

5. Where a sale is booked is no longer an indication of all the factors that contribute to a sale.

Focusing on sales allocation is misleading, and masks the complexity of the customer’s decision-

making journey and the symbiotic relationship across the physical and online sales channels.

6. In order to transform into an omni-channel operator, retailers must integrate all aspects of their

business models, which requires considerable investments. Even the most advanced retailers

have yet to fully implement their omni-channel strategies.

7. Retail real estate owners are acting as an enabler for omni-channel retail, providing enhanced

services for customers and assisting retailers with their distribution and fulfilment strategies,

leading to a more collaborative approach between owners and retailers.

8. New technologies are being explored both by retailers and owners. As well as engaging with

customers and providing them with enhances experience and service, this digital infrastructure

enables a much deeper understanding of consumer behaviour across channels.

9. Any legislative gap between the rules governing in-store sales and those governing online sales

threatens to distort fair competition in the single market and to slow down the innovation impetus

in the retail sector.

3

Introduction – why this paper?

The aim of this paper is to raise decision-

makers’ awareness on the policy implications of

the structural shifts the retail sector is

undergoing with the emergence of omni-

channel business models. There is a growing

consensus that the brick-and-mortar vs. e-

commerce debate is long outdated, but what is

less well-known is why it is outdated – yet this

is what matters most when legislating.

Retail real estate owners have been quick to

innovate and recognise the opportunity that the

digitalisation of the retail value chain presents

for businesses and consumers alike. However,

major restructuring of retail business models is

ahead of us across multiple dimensions

including logistics, inventory management,

distribution, customer insight, merchandising,

marketing and accounting – and even the most

advanced market players have yet to fully

embrace this new paradigm.

Legislation can hardly keep up with the scale

and rapid pace of change that is driven by the

digital revolution, raising challenging policy

issues for public authorities. That is why the

European Commission endorsed in May 2015 a

strategy aimed at better adapting EU legislation

to the digital economy.

Although there is much in the Digital Single

Market (DSM) Strategy that is forward-thinking,

the risk with legislating in a constantly evolving

framework is not to get the whole picture and

underestimate the complexity of the new reality

– in particular here, the omni-channel reality.

Notably, after having defined omni-channel

retail, this paper focuses on five topics which

are being covered in the DSM Strategy:

1. Contract rules for the online sale of goods

2. Unjustified geo-blocking

3. VAT for e-commerce

4. Big data

5. Online platforms

It is of the utmost importance that policy-

makers are aware of the intricacies of the retail

sector today, ahead of the roll-out of the DSM

Strategy.

What is omni-channel?

It is critical to get this one right to understand

the growing complexity of the European retail

sector. More specifically, clear distinction has to

be made between multi-channel and omni-

channel retail to understand the policy

implications that the latter raises.

Over the past decade, it has becoming clear

that the consumer browsed online and shopped

in-store and vice-versa. In most markets, the

first decade of the 21st century witnessed a

rapid shift from a binary market of pure-play e-

tailer versus brick-and-mortar retailer to one

dominated by multi-channel retailers. Even

pure-play e-tailers have started to establish

some form of physical retail presence to

increase their market share.

Consumer behaviour is no longer binary either.

More importantly, consumers have seamlessly

integrated technology into their buying

behaviour. Shopping journeys are complex and

vary between consumers and across different

modes of shopping. Consumers browse

inventories, compare and research products

online and/or in-store in advance of a purchase.

Fulfilment of the product is also variable and

may be received immediately in-store, collected

from store or delivered to home or an

alternative address or collection point. The

customer journey also extends beyond the

4

purchase decision with the post-purchase

experience, which includes reviews and

returns, but also presents the opportunity for

retailers to make further recommendations and

target highly relevant offers to consumers

based on their purchase history.

This approach requires multi-channel retailers

to shift from essentially operating separate

retail platforms towards one, integrated

platform. This is omni-channel retail.

For omni-channel retailers, what matters is that

the sale occurs and that customers’

experiences are positive. Customers expect a

‘one-customer, one-company’ service, a

demand that exceeds many retailers’

capabilities. Omni-channel shopping behaviour

forces retailers to mature from multi-channel

platforms to an omni-channel organisation,

which requires considerable investments

throughout the whole value chain.

In order to transform into an omni-channel

operator, retailers must integrate all aspects of

their business models. Nearly all market

players have incorporated this goal into their

business plans, but few have achieved full

integration at this point in time. Central to this is

the integration of teams to enable a holistic

approach to understanding customers,

developing the retail proposition, selecting

stock, tracking inventory, merchandising and

marketing strategies.

Before going any further on the DSM Strategy,

the following is a telling example of how omni-

channel is changing retail at its core, by

challenging the sustainability of traditional retail

leasing and rental models.

Traditional leasing models are not fit

for purpose anymore

In-store sales are no longer an accurate proxy

for the contribution of a store to total sales.

Consumers are engaging with multiple in-store

and online touchpoints before actually buying.

As such, the role of the store is changing.

Retailers are pursuing omni-channel strategies

that seek to maximise total sales. They are not

only encouraging consumers to use the

physical store as a delivery channel for sales

transacted beyond the store, but are also

equipping sales staff and consumers with

devices that facilitate online orders from within

the store. What matters to the retailer today is

the occurrence of the sale, not where it

eventually transacts.

Despite the above, rental models for capturing

the value of a store have remained broadly

unchanged. Conventional models are

predominantly used. These include a base rent

accompanied by a variable income calculated

as a percentage of sales achieved by the

retailer (tenant) above a certain threshold –

often referred to as turnover rent.

Consequently, as consumer journeys become

more complex, turnover rent models fail to

reflect the true value of a store to one retailer’s

total sales, as they do not capture the

contribution of the store to the sales that

occurred online. To address this issue, real

estate owners (landlords) are increasingly

proposing geo-fence turnover models, whereby

one store’s turnover includes all sales within an

agreed catchment area. Using postal or other

locational codes, online sales are geo-coded

and attributed to specific store-based locations.

Nevertheless, retailers tend to be reluctant to

share turnover data on non-store sales with

owners, and lease agreements continue to

5

reflect the balance of power between the

retailer and the owner. More embryonic

retailers may be open to collaborate with

owners, but large retailers may use their

bargaining power to maintain traditional

turnover rent models – although these are not

fit for the omni-channel reality and put the

business model of shopping centres, as well as

of the retail real estate sector as a whole, at

stake.

Omni-channel shakes the very foundation of

the retail sector. Whereas multi-channel has

blurred the traditional boundaries between

online and offline retail, omni-channel is

removing them – with all the policy challenges

this implies, in particular the need for a level

playing field between the rules governing brick-

and-mortar retail and those governing e-

commerce. It is therefore essential that EU

policymakers examine how omni-channel is

transforming the retail sector in the same way

they are considering the upheavals caused by

e-commerce.

Recommendations

ICSC supports the European Commission’s

aim to examine the impact of the relative

bargaining power of some actors when

negotiating terms and conditions with other

market players for online platforms;

similarly, ICSC recommends the European

Commission to examine the impact of the

relative bargaining power of some actors

when negotiating terms and conditions (e.g.

lease agreements) with other market

players for offline platforms, i.e. for retail

real estate.

1. Sales contracts: from one legal

fragmentation to the next

In late 2015, the European Commission

published the first legislative proposals to be

presented as part of the DSM Strategy – one

on the supply of digital content and one on the

online sale of goods. The proposals aim to

tackle what the Commission considers as the

main obstacles to cross-border e-commerce in

the EU, namely legal fragmentation in the area

of consumer contract law.

However, harmonising contractual rights for

online sales only will create a de facto

fragmentation between the online sales and the

offline sales of the same good. The proposal

seeks to reduce costs for businesses and

strengthen consumer trust when buying online

from another country, but it might have the

opposite effect.

Having to cope with two different regimes for

cross-border online and offline trade of goods

would be a burden for omni-channel

businesses and a brake on innovation for those

aiming at an omni-channel strategy. Likewise, a

consumer might research a good online,

experience the good in-store, and, after

reflection, purchase it online for an in-store

pick-up – making contractual fragmentation

between online and offline sales not only

outdated but also incoherent.

The proposal for a Directive on the online sales

of goods risks slowing down the innovation

impetus in the retail sector and confusing

consumers. The Commission actually foresaw

this threat in its proposal and announced its

intention to align the rules for online and offline

sales of goods in the near future, in the context

6

of its Regulatory Fitness and Performance

Programme (REFIT).1

In light of the above, the Commission did not

preclude the possibility that the results of the

Fitness Check exercise on the application of

the Consumer Sales and Guarantees Directive

to face-to-face purchases of goods “feed into

the progress made by the co-legislators on the

proposal for online and other distance sales of

goods.”

Recommendations

ICSC urges the European Parliament and

the Council to take these concerns into

consideration when adopting the proposal

for a Directive on certain aspects

concerning contracts for the online & other

distance sales of goods, and ensure

consistency between the contractual rules

governing the face-to-face and the online

sales of goods throughout the EU.

2. Geo-blocking: how offline barriers

nurture online restrictions

Unjustified geo-blocking and other forms of

discrimination based on nationality or place of

residence are considered contrary to the

principles of the EU Treaty. Yet, there may be

instances in which a different treatment is due

to objective differences in the customers'

situations, such as delivery costs, dissimilar

VAT rates and diverging payment rules – to

name but a few. By way of example, market

access and operational restrictions play a role

in stimulating geo-blocking practices.

1 Proposal for a Directive on certain aspects

concerning contracts for the online and other distance sales of goods, European Commission, 2015/0288, p.3

The extension and greater complexity of

consumer journeys characterising omni-

channel shopping behaviour have

increased, rather than diminished the role of

physical stores. Most retailers now realise that

the physical store is the cornerstone of their

overall retail operation. Strong synergies

between sales channels have been evidenced

by increased online sales in markets where the

retailer opens a store.

Omni-channel business models lie in the fact

that online and in-store sales benefit

cumulatively from an integrated operation.

Under these circumstances, the decision to

resort to geo-blocking may lie behind

disproportionate restrictions to retail

establishment at national, regional or local

level, which prevent a retailer to fulfil its omni-

channel strategy in an optimal manner. The

same goes for unjustified operational

restrictions which hamper a retailer’s daily

operations.

Retailers have shifted store expansion

strategies to conquering principal cities, rather

than countries, reflecting the greater marketing

reach of flagship and major stores. The size of

appropriate store portfolios will vary according

to the scale of the market and the

characteristics of the retailer with regard to

sector and target audience.

Commercial and legal barriers in the offline

world, in particular restrictions to retail

establishment and operational restrictions,

constitute a significant barrier to the

development of cross-border e-commerce.

Therefore retailers would have little incentive to

resort to geo-blocking if existing barriers to

cross-border trade were being addressed, and

7

in particular, if the Services Directive was

enforced.2

Recommendation

ICSC believes that a thorough analysis of

the retail landscape and the principle of

contractual freedom, as well as a

comprehensive assessment of the

transformation the sector is undergoing, are

a prerequisite for any regulatory action on

unjustified geo-blocking.

3. VAT: sales channel does not

matter

The fragmentation of the single market in 28

diverse fiscal jurisdictions represents a real

obstacle for companies trying to trade cross-

border both online and offline. As such, further

harmonisation and convergence of the VAT

systems, rates structure and levels in the EU is

desirable, regardless of the sales channel.

The customer does not care where a purchase

is made, but demands excellent incentivised

service at all stages of the shopping

experience. Where a sale is booked is no

longer an indication of all the factors that

contribute to that sale. Increasingly sales are

being attributed to profit centres based upon

the geographical reach of stores rather than by

retail channel.

Very much like for sales contracts, having to

cope with two different VAT regimes for e-

commerce sales and for offline ones

respectively would be a burden for omni-

channel businesses. In addition, further

fragmentation and distortion of competition – to

2 Directive 2006/123/EC on services in the internal

market

the detriment of those pure players which do

not aim at an online strategy – are to be

expected from simplified VAT rules which

would be specific to cross-border e-commerce.

Recommendations

ICSC welcomes initiatives aimed at

reducing obstacles to cross-border trade

stemming from the fragmentation of fiscal

rules in the single market, provided that all

cross-border sales, regardless of whether

the transaction has occurred online or

offline, enjoy equivalent rules.

ICSC calls on the European Commission to

take these concerns into consideration

when preparing the proposal on VAT for

cross-border e-commerce, so that all

businesses can benefit from simplified rules

for VAT registration, calculation and

declaration; easier access to information on

each Member States’ VAT systems; single

audit methods for VAT purposes; and a

single level playing field among intra EU

transactions and imports from third

countries.

4. Big data: it all comes down to the

customer

With the advancement of omni-channel retail,

digital is becoming fully integrated into every

area of the value chain – so as the use of big

data. Retail real estate owners have initially

focused digital strategies on developing

services that greatly enhance the customer

experience, such as shopping centre apps

which provide them with readily accessible

information. Owners are investing in new

technologies to help them better understand

their customers’ value and anticipate their

wants and needs.

8

Innovative owners are using location tracking

technologies, including Wi-Fi, beacons, and

GPS/mobile devices – potentially collecting

both personal and non-personal data by doing

so, just like loyalty programmes by card. Where

customers with smartphones opt-in to a

shopping centre system, owners are able to

gain further insight on their increasingly

complex shopping behaviour by asking for

information on a ‘give to get’ basis. These

beacon captures allow owners to develop a

much better understanding of consumers and

their interaction with the centre.

The customer insight derived is also valuable to

retailers within a centre and those considering

opening a store. Most owners are using their

analysis to strengthen relationships with

retailers, and as a tool to explain and support

asset management initiatives. Understanding

synergies with other retailers and their relative

performance within the centre is valuable

knowledge to the owner.

By linking their stores to their website, mobile

apps, and social media activity, the use of big

data in the omni-channel world allows retailers

to deliver a frictionless experience to their

customers – raising data processing, ownership

and privacy issues.

Recommendations

ICSC welcomes the adoption of the

General Data Protection Regulation that will

improve legal certainty.


table ambitious initiatives to address the

emerging issues of data ownership,

interoperability, usability and access within

the EU, so that both businesses and

consumers make the most of the

opportunities offered by the data economy.

5. Online platforms: brick and mortar

is catching up

Regardless of whether an e-commerce platform

acts as a marketplace, a retailer or both, it does

not have the same needs as traditional

retailers. In essence, what e-commerce

platforms need is logistics for home delivery

and collection, notably warehouses or pick-up

points.

From a retail establishment point of view, this

may provide a competitive advantage to e-

commerce platforms as compared to brick-

and-mortar retailers, in particular if the e-

commerce platforms are not covered by the

scope of the retail establishment

regulations, as pointed out in a recent study

commissioned by the European Commission.

Yet, “the number of Member States that have

adopted regulation including or imposing

requirements for the establishment of such

warehouses or pick-up points remains rather

limited.”3

In trying to integrate all aspects of their

business models, brick-and-mortar retailers

aiming at an omni-channel strategy seek to

compete on equal terms with those e-

commerce platforms. Integrating operations

involve three major stages: 1) effective

inventory management and tracking; 2)

facilitating fulfilment as inexpensively as

possible; and 3) integrating marketing and

brand experience.

3 Legal study on retail establishment through the 28

Member States: restrictions and freedom of establishment, Holland van Giizen Advocaten, project No. 2014.102, 2016, p.37

9

Most retailers are still catching up, with more

experimentation required. Fulfilment, inventory

and warehouse management, the keys to

unlocking profitability, represent the top

priorities for the majority of retailers, requiring

considerable investment and a flexible

regulatory framework.

Recommendations


take these concerns into consideration

when preparing the best practices to

facilitate retail establishment and reduce

operational restrictions, so that brick-and-

mortar retailers can compete on an equal

footing with e-commerce platforms.

Retail is changing, so as the single

market

The store still accounts for over 90% of retail

sales in even the most mature online retail

markets. It is generally believed that this

percentage will decrease, as online retail sales

gains continue to outpace those of in-store

sales. However, focusing on sales allocation is

misleading, and masks the complexity of the

customer’s decision-making journey and the

symbiotic relationship across the physical and

online sales channels.

The physical store is now viewed as a key to

branding and showcasing products. This space

must be experiential in a way that establishes

the image of the retailer, while also showcasing

its products in a way that drives sales. Whether

the sale then occurs at the register, as an

online sale picked up in the store, as a

subsequent online sale, as an in-store online

sale through a smartphone, or as a

return/exchange of an online purchase, does

not matter to the modern retailer and customer.

Omni-channel retail is a symptom of the ever-

greater integration of the physical and the

digital single markets. As omni-channel retail

continues to evolve, the structure of the retail

landscape will adapt and respond. Retailers are

merging their physical and online platforms to

increase total sales, lower costs and improve

service levels to customers – and retail real

estate owners provide the platform where

online and offline retail can meet and band

together.

Retail real estate owners are acting as an

enabler for omni-channel retail, providing

enhanced services for customers and assisting

retailers with their distribution and fulfilment

strategies by way of offering free Wi-Fi,

centralised click-and-collect services and

collection lockers for online retailers, etc.

leading to a more collaborative approach

between owners and retailers.

Under such circumstances, any legislative gap

between the rules governing in-store sales and

those governing online sales threatens not only

to distort fair competition in the single market,

but also to slow down the innovation impetus in

the retail sector – driven by the omni-channel

revolution.

Documents

Exploring nEw lEasing ModEls in an OMNI-CHANNEL WORLD › competition › antitrust › e... · an Omni-Channel World 34 6.4.1 Click and Collect 35 6.4.2 Returns 36 6.4.3 Online Transactions